Cross-Border Alliances in the Age of Collaboration

Cross-Border Alliancesin the Age of Collaboration

by John R. Harbison Peter Pekar, Jr.

n the last two years, more than 20,000 alliances

have been formed worldwide, and approximately

75 percent of those have been across borders. In

the United States alone, more than 6,000 alliances have

been formed, more than half with foreign companies

(Exhibit 1). While cross-border alliances have been around

since the early days of civilization, we’re now witnessing

a surge in their popularity and some fundamental shifts

in what is required for an alliance to succeed. We’re

also seeing that alliances are yielding superior returns

on investment and that the more experience a company

gains in alliances, the greater its returns from them.

I

Flourishing cross-borderarrangements are changing theglobal business environment inmost industries in ways we arejust beginning to understand(Exhibit 2). In many industries(including communications,electronics, health care, trans-portation, energy and services),the global demands on technol-ogy and financial resources areforcing companies to ally inorder to be able to compete,often at the same time thatindustry boundaries are blur-ring and new capabilities have become critical. In theseindustries undergoing rapidchange, alliances have grownthe most quickly.

We believe that the worldhas entered a new age — “AnAge of Collaboration” — andthat only through allying cancompanies obtain the capabili-ties and resources necessary to win in the changing globalmarketplace. Self-reliance is anoption few companies will beable to afford. Many academicsand new-age gurus believe thatcross-border alliances are a fad,but we strongly disagree. We areconvinced that alliances are acentral, essential and permanentengine to achieve growth.

Booz•Allen has beenstudying cross-border alliancesfor nearly a decade and hasrecently completed a globalstudy of alliances and alliancepractices, covering 5,500alliances and more than 500companies. Using this researchand our work with clients, wewill demonstrate that alliancesare being formed in nearly allregions of the globe, are rele-vant to almost all industries andare resulting in higher returns tothose companies proficient inalliance-building.

Exhibit 1Geographical Access Is the Key to a Vast Majority of Alliances

Cross-Border Intensity by Region

Source: BA&H analysis of worldwide transactions from 1994-1996

Defining a Strategic Alliance

In our 1994 viewpoint “A Practical Guide toAlliances: Leapfrogging

the Learning Curve,” we defineda strategic alliance as a coopera-tive arrangement between two or more companies in which:• A common strategy is devel-oped in unison and a win-winattitude is adopted by all parties.• The relationship is reciprocalwith each partner prepared toshare specific strengths with the other, thus lending power to the enterprise.

• A pooling of resources,investment and risks occurs formutual gain.

Within the overall domainof extended enterprise, a strate-gic alliance fills the middleground between transactionalarrangements and acquisitions.For a broader look at the domainof extended enterprises, pleasesee the first viewpoint in ourseries, “A Practical Guide toAlliances: Leapfrogging theLearning Curve.”

Choosing the RightStructure

At one end of the spec-trum are sourcing relationships, best

when the capability beingaccessed is not critical to thecustomer, where scale isrequired in some components or subsystem beyond what acompany can achieve on its own or where there is no needfor more lasting control.

At the other end of thespectrum are acquisitions,which are best in situationswhere one party is far larger

Exhibit 2 Most Industries Active in Alliances

Alliances by Region and Country

Source: Alliance Analyst, SDC, BA&H Analysis

Note: Width and area are proportional to number of alliances.

than the other, where implemen-tation must be done quickly or where the desire is great toavoid the protracted negotiationstypical of equity joint ventures.In industries such as aerospace/defense or banking, with theirdramatic excess capacity andneed to cut costs ruthlessly andconsolidate, acquisitions areusually the preferred route.

A good example is Ford’sacquisition of Jaguar. Ford was seeking a luxury car with a global footprint to expand itsproduct line upscale. But across-border alliance was notlikely to have achieved Ford’sobjectives, because Jaguarlagged behind Ford in quality-control techniques and produc-tivity standards. Ford correctlyrealized that control of the

manufacturing process would be required to return Jaguar to world-class standards, and the only way to achieve thismeasure of control was throughacquisition.

Strategic alliances are notbetter or worse than these otherforms of extended enterprise.But in many circumstances they are the preferred structure,particularly when acquisitionsare not feasible because of con-straints on cross-border controls,financial limitations or whenrelevant capabilities are insepa-rable from the parent.

Among the circumstancesin which cross-border alliancescan be more advantageous thanacquisitions are these: • Distance doesn’t make theheart fonder — Acquisitions

are difficult to integrate whenspanning great distances andcrossing borders.• The empty-shell syndrome —Too often the best people leavewhen a foreign parent becomesthe new owner and moves toconstrict local management’smaneuverability.• Same bed, different dreams — Trust-building andstrategy formation are harder inforeign acquisitions because ofthe cultural differences that haveto be overcome.

Alliances help avoid thesepitfalls by making the partnerswork together in a disciplinedmanner, building trust at all levels of the organization. Alli-ances are also preferred wherean evolutionary approach isdesired, as in Apple Computer’salliances with IBM in PowerPCand Taligent. When these werebeing formed, the participantssaw them as potential precursorsto a broader relationship.

Yet strategic alliances can be an order of magnitudemore difficult to negotiate than acquisitions. Newcomers to the world of alliances findnegotiation the most frustratingelement, and in some cases, theyrush into a relationship withoutappropriate safeguards or ade-quate resolution of critical issues.

Experienced alliance practitioners recognize that theintense negotiation processallows the partners to agree oncommon objectives, quantifica-tion of value-creation opportuni-ty, relative contributions of the partners, rights and obligations,management structure, conflict-

Exhibit 3 Alliances Growing as a Source of Revenue

Alliances as Percentage of Revenue forTop 1,000 U.S. Public Corporations

Source: Columbia University, European Trade Commission, Studies by BA&H1983-1987, 1988-1993, 1994-1996

resolution procedures and cul-tural-integration issues. Indeed,the more complex the negotia-tions, the greater the likelihood thealliance itself will be successful.

No magic rule about 50/50ventures, or 51/49 ventures, pro-vides a clear guideline. It is bestto make the choice of the rightstructure after assessing andunderstanding the objectives ofthe relationship, the motivationsof the parties to the transaction,the drivers of value creation andthe core capabilities that need to be accessed. One JapaneseCEO, for example, revealed that his strategy was to seek control through key managementpositions rather than equity positions. His U.S. partners were so absorbed with the equityissue that they didn’t realize that effective control was beingceded.

The Momentum BehindCross-Border Alliances:

A lliances are growing at a phenomenal rateand are yielding supe-

rior returns. Nearly 15 percentof the revenue generated by thetop 1,000 U.S. firms comesfrom alliances — a fourfold increase since 1987(Exhibit 3). In studying morethan 5,000 U.S. and globalalliances from 1987 to 1996, welearned that the average returnon investment from strategicalliances is more than 16 per-cent, significantly higher thanthe average return the same cor-porations earn on other activities

Exhibit 5 Alliances Result in Higher ROE

Alliance Intensity Effect on ROE

Source: Alliance Analyst; BA&H Analysis

Exhibit 4 Alliance ROI Outperforms Industry

Average Return on Investment

Source: 1989-1993 BA&H survey of 2,500 U.S. alliances and 1994-1996BA&H alliance study of 200 non-U.S. alliances

(Exhibit 4). A recent analysis ofthe Fortune 500 found that the25 U.S. companies most activein alliances earn more than 17percent on equity, comparedwith the Fortune 500 average of12 percent. The 25 companies least active in alliances earnedan average of 10.1 percent(Exhibit 5).

Alliances, a worldwidephenomenon, are digging deeproots. While high-tech commu-nications, computer hardware,software and electronics accountfor 30 percent of worldwidealliance formations, other indus-tries are also being affected, particularly health services,transportation, energy, consumer

products and services. Evenlocal businesses like electricalutilities and funeral parlors arebeing swept up in globalalliances. Electrical utilities,traditionally a local industry, has seen a 57 percent annualgrowth in the number of alliancessince 1992 alone. Overall, theU.S., Europe and Asia nowaccount for about 90 percent ofrecent global alliance formations.

North American compa-nies now represent more than athird of all alliances, and about35 percent are strategic (definedhere as an alliance involving an equity stake) (Exhibit 6). This is up from 20 percent inour 1994 survey. Interestingly,

the Japanese are less active in equity ventures than companiesin Europe and elsewhere inAsia. Latin America and India,both relative newcomers to thealliance game, are emerging fromgovernment protectionism andare rapidly becoming players.

Alliance investmentstakes are highest in Asia. Theaverage cross-border allianceinvestment varies by countryand region (Exhibit 7). As U.S.companies increasingly lookoversees for alliance partners,they should recognize that thestakes required to participate aregrowing: the average globalstrategic alliance investment bythe top 1,000 U.S. companies

Exhibit 6 U.S. Alliances Still Less Strategic

Alliances by Type1994 – September 1995

Source: Alliance Analyst; SDC; BA&H Analysis of more than 15,000 alliances formed in 1994-1995

rienced firms. In some indus-tries, we have seen four andfivefold increases as learningtakes hold. We have also foundthat a set of best practices accel-erates learning and increases thereturn on investment.

CEOs recognize thevalue of strategic alliances.Five years ago, our surveysshowed that 20 percent of CEOs in the United States gavea favorable rating to alliances, far lower than the level ofacceptance among European and Asian CEOs. Today we find that more than 60 percentof CEOs in the United Statesapprove of alliances, approach-

ing the acceptance rate inEurope and Asia.

Crusader Syndrome: Some Common-Sense Traps to Avoid

Pragmatic executives areoften suspicious, andrightly so, of simple suc-

cess formulas. Some executivesmaintain that “seat-of-the-pantsmanagement” and “pure luck”play an important role in anyalliance. Luck certainly helps a business alliance succeed.

amounts to only $20 million,compared with $90 million inAsian alliances. The U.S. alsolags in sales per alliance, withonly $80 million in contrast tomore than $250 million forEuropean alliances.

Learning yields results.The returns on investmentimprove as a company gainsexperience in alliances both inthe United States and overseas.(See our 1994 viewpoint, “APractical Guide to Alliances:Leapfrogging the LearningCurve.”) Our surveys havefound that experienced firmsearn twice the return on theiralliances compared with inexpe-

Exhibit 7 Alliances Average $48 Million Investment

Alliance Size by CountryMillions of Dollars Investment per Alliance

Source: Alliance Analyst, SDC, BA&H Analysis of more than 15,000 alliances formed in 1994-1995

However, we will show that the“luckiest” and most successfulcompanies are those that learnfrom others. As the baseballexecutive Branch Rickey oncesaid, “Luck is the residue of design.’’

In our examination of hundreds of failed and failingcross-border alliances, we haveidentified a number of traps toavoid:

1) Believing they are ourkind of people — failing to take the time to select the right partner.

In domestic alliance-building,picking the wrong partner canlead to disastrous consequences.That is doubly true in cross-border alliances. Too manycross-border alliances are reac-tive, a response to overtures by other companies that have notbeen thoughtfully assessed.Evaluating the suitability of a potential partner’s culture,behavior and capabilities isessential. Only after a number of hard knocks have such companies as Ford, Xerox,Hewlett-Packard, Corning and General Electric forged suc-cessful cross-border alliances.

2) Until death do us part — failing to agree on objectivesand goals.

Too many companies assumetheir partner has the same aspirations and goals. This isespecially true in developingcountries where the host partneris seeking technology and the

foreign partner market access.Often what seemed a perfect fit ends up in disagreement.

A U.S. computer company,for example, formed an allianceto build a personal-computerproduction plant in a developingAsian country. They hoped thatwith the local government’s support, they could sell PCs tothe country’s engineering andscientific community. But thosecustomers were purchasingcomputers in the U.S. becausethey believed that any home-produced product was inferior,and the alliance did not changethat perception. What is more,the Asian partner was moreinterested in acquiring the newtechnology for export than inchanging local customers’ per-ceptions. The alliance foundered.

3) No paroles, no pardons —failing to plan for flexibilityand change.

Asian and European companiesexcel in their ability to be flexi-ble. Contracts are written withthe idea that they may changeshould conditions change.“Pardons” and “paroles” areaccepted modes of behavior, andpartners frequently ask for time-outs to reassess the alliance.

Without an explicit under-standing of each other’s goalsand expectations and the typesof behavior that partners willassume should the alliance divert from its original objec-tives, misunderstandings willsurface and more serious disagreements can develop.Partners need to structure

clauses that allow for periodicreassessment and time-out periods for re-evaluation.

4) Relying on U.N. peace-keeping — counting on thirdparties to come to the aid ofdisagreeing partners.

Too often, cooperation fevergrows so fast that it sweeps awaygood sense. Without clear com-munications, many cross-borderalliances create unbridgeablegaps by talking past each other,which leads to tensions, frustra-tions and eventually suspicions.

In these situations, man-agers often turn in desperationto uncommitted third parties —such as government officials —for help in resuscitating thealliance. In the former SovietUnion, for example, many for-eign companies rushed headlongto form alliances, making themisguided assumption that gov-ernmental support would ironout any difficulties that arosebetween partners. This rarelyworks. A successful alliancerequires that communicationsprocesses, arbitration, penaltyclauses and divorce conditionsbe agreed upon at the start.

5) Assuming no child support — failing to planproperly for continuingresource requirements andthe consequences of a termination of the alliance.

While planning is important in any alliance, it is particularlycrucial in a cross-border alliance. The dissolution of a

deal is likely to result in the creation of a competitor andalso risks alienation of the customers, suppliers and distributors of the foreign partner.The result is not just divorcing aspouse but all of the spouse’srelatives.

Many times these partieshave supported an alliancebecause the foreign partner usedits leverage to line up support.Should the alliance quickly dissolve, the foreign partner and its senior management will loseface. To anticipate such situa-tions and avoid the acrimonythat can occur, Western man-agers need to have a clear

understanding of the culturaldynamics and organizationalforces at work in the partner’senvironment.

Cross-Border BestPractices: Adopting aDisciplined Approach

Our experience shows that a disciplinedprocess is essential to

achieving superior results incross-border alliances (see our1993 viewpoint “A Practical

Guide to Alliances: Leapfrog-ging the Learning Curve”).The fundamental phases ofactivity — identification, evaluation, negotiation andimplementation — involve eight steps (Exhibit 8). We havefound that successful companiescover each of the eight steps inorder, while less-experiencedcompanies either skip steps orproceed in random orderthrough the sequence. Theresults are usually disastrous.

For example, we wereinvited by a major pharmaceuti-cal firm to discuss cross-borderalliances. Before the discussionbegan, a divisional head said:

Exhibit 8Roadmap to Alliance Success

Alliance Formulation Methodology

“I have 18 exciting alliance pro-posals on my desk. Would youlook at them and give me anopinion? There is a lot of pres-sure here to make somethinghappen.” It reminded us of whenAlice asked the Cheshire Catwhich way she should go.

“That depends a good dealon where you want to get to,’’he responded.

“I don’t much care where,’’Alice said.

“Then it doesn’t matterwhich way you go,” the catreplied.

Booz•Allen has accumu-lated a body of knowledge andexperience that can help man-agement avoid repeating suchmistakes. Each of the eight

steps of our alliance formationmethodology is broken downinto its “best practice elements,”which were developed by surveys, interviews and workwith our clients.

We asked each company to rate its skill level for eachbest-practice element. Next, we created groups based on thenumber of alliances in which acompany had been involved,and its average return on invest-ment from each alliance. Wefocused on the best performers(companies with more than ninealliances and a return of morethan 25 percent) and the weak-est ones (companies with one or two alliances and a return on investment of less than 10

percent), and we isolated theelements that had the greatestspread in skills.

We have grouped theresulting 100 best-practice ele-ments into the eight steps of ouralliance formulation method-ology. Associated with each element is a skill level — level 1,the weakest, through level 4. Wefound that this allows manage-ment to use self-diagnosis tocompare its current practice levelwith those of companies thathave achieved superior results.

Our most recent survey on alliances, covering the U.S.,Europe, Asia and Latin America,produced these findings:

U.S. lags Europe andAsia in alliance skills.

Exhibit 9 Europe and Asia Sees U.S. as Behind in Integration and Implementation

U.S. Alliance Skills Rated by Europeans and Asians

Source: 1994-1996 BA&H alliance study

Europeans’ and Asians’ self-assessment ratings were higherthan the U.S. ratings, and this is supported by our client workand field interviews. We alsoasked European and Asian managers to rate their U.S. part-ners’ skill base, and the findingswere revealing — all the moreso when you consider thatEuropeans and Asians have forthe most part aligned themselveswith experienced alliance-form-ing companies in the U.S. Ouroverseas clients also tell us thatthey tend to avoid inexperiencedU.S. companies.

European and Asian managers see the U.S. having anedge in partner screening, lever-age assessment, stockholders’analysis and bargaining skills(Exhibit 9). This is certainly an improvement from what

we found five years ago. TheEuropeans and Asians said theirU.S. counterparts were behind inthe critical skills of integrationplanning and implementation.American companies are tooquick to think the job is com-pleted when the negotiations arefinalized. As the Europeans andAsians know, that is just the beginning.

For American companiesseeking alliances overseas, thesefindings hold significant rele-vance. How prospective partnersperceive them has major impli-cations on the structure andownership formulas of cross-border alliances that Americancompanies explore.

Of all the skill areas inwhich the Europeans and Asianshave an edge, nowhere is thespread greater than in the negoti-

ation and implementation stages(Exhibit 10). U.S. firms willneed to close these skill gaps inorder to become effective globalpartners and winners in the global age of collaboration.

Issues and Concerns Vary by Region:

Companies in differentregions also place differ-ent emphasis on the

issues most important to theirexecutives (Exhibit 11). Heretoo, U.S. firms are concernedmore about transactional issues,European and Asian firms moreabout strategic issues.

Among experienced cross-border alliance firms in Europe

Exhibit 10 Top Strategic Alliances’ Success Factors

Best Practices with Largest SpreadsU.S. vs. Europe and Asia

Source: 1994-1996 BA&H alliance study

and Asia, the concerns expressedby CEOs were:• How to manage multiple orglobal alliances. • Conveying to a partner thestrategic nature of an alliance,and the possibilities of expan-sion and further cooperation.• Anticipating and planning tomeet the threat of other alliances.• How much of the company’sstrategic intent to share with apartner, stakeholders and gov-ernment officials.

American CEOs, on theother hand, were more concernedwith operational issues, as wellas with negotiation, integrationand implementation. The lack of emphasis on strategic issuesshouldn’t be surprising, becauseAmericans are still new to thisgame and are still learning howto make cross-border alliances.

Institutionalizing Alliance Skills

Many paths are avail-able to achieve asuperior institutional

alliance capability. Corning is agood example of the intuitiveapproach. In this model, themeans of transferring learning is largely oral tradition andalliance skills are deeply embed-ded in the fabric of the compa-ny’s culture. Success under thisapproach takes many decades to achieve. Corning is clearly a grand master, with more than 50 major alliances, some dating

back more than 60 years. All butfour remain active, and manyhave become large entities intheir own right, including DowCorning, Samsung Corning,Pittsburgh Corning, OwensCorning, Siecor and CorningAsahi Video.

In the intuitive model,help is usually down the hall,and there does not seem to be aneed for formal training andmanuals of best practices. A sin-gular geographic location, inCorning, N.Y., for corporateheadquarters and many operat-ing units facilitates this oral tra-dition and transfer.

For many other companies,a more disciplined process isessential, and Hewlett-Packard isa good example. H-P decidedseveral years ago to build its

alliance skills into a differentialcapability. The company orga-nized a process group to synthe-size learning from dozens ofrecent alliances, codify bestpractices and produced a 400-page manual. The top 1,000managers received copies, andthe manual became the basis for a popular training course.Because it has been so success-ful in institutionalizing bestpractices, H-P is reluctant toshare its learning with othercompanies. The newfound skill in alliance management is a truly differential capabilitythat it wants to exploit.

We have observed, however, that most companiesevolve their alliance approachand capability over time. Wecall the first level the ad hoc

Exhibit 11Alliances Issues/Concerns Vary by Region

Concerns Expressed by CEOs

Source: Comments from 1994-1996 BAH survey

approach (Exhibit 12), and most U.S. companies are todaybehaving at this level. In thistype of company, there is littleknowledge capture and few bestpractices. Essentially, people areon their own, learning how to do alliances based on their ownexperiences. In an environmentwith few alliances, this is ade-quate. But given the increasingimportance of alliances, thisapproach usually produces frustrating and probably unsat-isfactory results.

The next level is what wecall the lone ranger approach,where the learning of the corpo-ration resides in one or two spe-cialists who get called in duringnegotiations to act as the gun-slingers of alliance knowledge.

This is often quite helpful buthas two drawbacks. First, withthe surge in the number ofalliances, the lone ranger isquickly overtaxed, even if thelone ranger becomes a smallgroup of rangers. Second, theranger is usually involved onlyin the formation of the allianceand not in its management. Thatleaves the operating entitieswithout the guidance and assis-tance they need.

The most skilled level isthe institutional level. Here,there is a normalization of procedures, often a dedicatedstaff with a high degree of sharing, and in general someestablished repository of knowl-edge for future use. There are

many variations of how compa-nies have sought to build suchan institutional alliance capabili-ty, rather than one “right”approach. Lotus provides a goodexample of how companies areaddressing the institutionaliza-tion of alliance skills.

In the early 1980s, Lotuswas floundering and had no disciplined approach to itsalliances. In 1992, recognizingthe importance of strategicalliances to overall success, it decided to build an allianceorganization that quickly grewto about 50 people. Underscor-ing the importance of alliances,the business-development func-tion reports to the alliances vicepresident, a reversal of whattakes place in many companies.

Exhibit 12Most Firms Evolve Their Alliance Capability

Approach to Alliance Skill-Building

Lotus also assigns relationshipmanagers to each alliance whoare involved not only in the for-mation of the alliance but in itsimplementation and manage-ment. This approach has beenleft fairly intact since IBM’sacquisition of Lotus.

This arrangement bearssome similarity to product man-agers in consumer-product com-panies and program managers inaerospace companies. Their jobis to make sure all the functionalcapabilities of the company

come together to make the venture successful — withoutwielding line authority overthese resources. The role is oneof leadership, not execution, but clearly they are involvedthroughout the life of the alliance.

Future Role of StrategicCross-Border Alliances

Why are cross-borderalliances increasing-ly strategic? Exhibit

13 depicts the evolution ofalliance drivers over threedecades. The 1970s was the era of product performance, in which alliances generally

focused on getting access to thelatest technology and selling theproduct internationally. But thekey selling point was productperformance. In most cases, theboundaries between industrieswere very clear-cut, so a broaderset of capabilities did not needto be accessed. In the 1980s, theemphasis shifted to positionalfocus. Companies sought tobuild industry stature, consoli-date position and often gaineconomies of scale and scope.

Now, the emphasis is on capabilities. Industry linesare blurring, and markets arebecoming global. In these newlydefined competitive arenas,positional assets are not enough,and new capabilities are requiredto succeed. The name of the

Exhibit 13 Racing Toward Global Capabilities

Evolution of Alliance Drivers

game is to maximize deliveredvalue, to minimize total cost and to gain advantage.

At the root, three forcesare shaping alliances today:• The globalization of markets:It’s hard to imagine an industrythat is still dominated by localcompetition. • The blurring of industryboundaries: Technology has dri-ven many industries to convergerapidly, leaving everyone strug-gling to fill capability gaps thatwere not relevant under old definitions of industry segments.• Scarce resources and intensi-fying competition: No companyhas the nearly unlimitedresources (in time and money)

to develop the world-class capabilities to excel in allaspects of its business.

A recent Conference Boardsurvey of 400 CEOs found 70percent of their companies’alliances were with partners in other parts of the world. Ourresearch reinforces this findingand goes on to provide the link between the level of cross-border activity and the agenda of each particular industry.Exhibit 14 shows the percentageof alliances that involve partners in more than one country, brokendown by industry.

The bars at the top repre-sent industries where the pri-mary driver is technology or

market access, rather than geo-graphical access — because ofthe role alliances play in thoseindustries. These industries areundergoing rapid redefinition of requirements as boundariesblur and more integrated prod-uct and service offeringsbecome essential.

The bottom bars are indus-tries that are more stable in their boundaries and that usealliances to extend the geo-graphic footprint. However,even industries where capabili-ties are in flux are active inglobal alliances and representalmost half the transactions. Onereason why North Americancompanies are more involved in

Exhibit 14 Industry Agenda Drives Relevance of Cross-Border Alliances

Cross-Border Alliances ActivityPercentage of Transactions Involving Multiple Countries

Source: BA&H analysis of worldwide transactions in 1994-1996

“in-country’’ transactions is thatthe U.S. is stronger in some ofthese industries where require-ments are evolving rapidly. InNorth America, 45 percent of allalliances are formed in-country,compared with 10 percent of the alliances formed by Asianand European companies.

Consider how these twoprimary forces — globalizationand capability access — areplaying out in various industries.Exhibit 15 shows the capabilities-access dimension on the horizon-tal axis, and the globalizationdimension on the vertical axis.In the upper right box are indus-tries in the midst of a redefinitionof capability boundaries and an

internationalization of competi-tion. The computer, telecommu-nications and electronics industriesare excellent examples of howtechnology advances have creat-ed the need to build or accessquickly new capabilities thatwere not relevant previously, aswell as to establish global reach.

America Online, for exam-ple, within one month announcedthree major alliances that helpedit reposition itself. Had it failedto make such deals, its demisewould have been inexorable.Instead, it is better positioned tosurvive, through alliances withMicrosoft and Netscape, as wellas with AT&T.

At the bottom right of the

chart are industries in whichalliances are a critical element ofaccessing capabilities in sufficientcritical mass but for which theglobalization element is less im-portant, because the markets tendto be local. Some of these indus-tries will migrate into the upper-right quadrant area over time.

At the other end of thecomplexity dimension are theindustries at the bottom left,such as steel, paper and utilities,which are pursuing alliances on a much more measured andmodest scale. This group isusing alliances as the critical

Exhibit 15Primary Alliance Drivers — Globalization and Capability Gaps

Alliance Drivers

Source: BA&H 1994-1996 survey

element in achieving leadershipand also as transactions to poolresources. The upper-left quad-rant includes industries in whichalliances are critical more forchannel, market and geographi-cal access than because industrylines are blurring and new capabilities are needed.

The challenges are differ-ent depending upon where anindustry is in the matrix. Oursurvey asked companies to indicate their areas of greatestconcern (Exhibit 16). For indus-tries in the upper right, whichare seeking leadership throughalliances accessing both dimen-sions, the biggest challenges arein the area of partner assessment.This includes partner screening,

risk assessment, cross-culturalissues and implementation issues.

For industries in the bot-tom- left box, the issues are more transactional, includingsuch items as appropriate legalstructures and financial arrange-ments. For industries in the bottom right, the overall issue isrisk assessment, with emphasison deciding whether to ally,acquire or develop the capabilityinternally. A particular challengeis the assessment of the capabil-ity that the partner brings, giventhat the partner is involved typi-cally in a different industry.Finally, in the upper left, theissues revolve around cross-cultural differences, as well aspartner assessment.

One interesting phenome-non in alliances today is thatthey often bring together com-panies that compete, in waysthat benefit both companies aswell as their customers. Ouranalysis of 2,000 alliances in the past two years found that 52 percent were between competitors. The competitoralliance activity has been great-est in industries that are primari-ly in the upper-left quadrant of our matrix. The objective ofthese alliances is access to newregions rather than capabilities,as the airline, consumer prod-ucts and energy industries havesought to do. In addition, indus-tries such as health care have

Exhibit 16Challenges Specific to Alliance Drivers

Alliance Challenges

Source: BA&H 1994-1996 survey

redefined the boundaries of the service offering to the extent that many alliances inthat industry are between com-petitors. We also found thatalliances among competitors are more likely in industriesheavily involved in cross-border alliances.

AT&T has formed recordnumbers of alliances in recentyears — more than 400 since1990. One reason is that it iscompeting in an industry in theupper-right quadrant. At thesame time, it is seeking toachieve both step-changes incapabilities and global expan-sion. This high level of activityis likely to continue as AT&Tbreaks itself into three separatecompanies.

PepsiCo is a companyfocusing more on the upper-leftquadrant, where it seeks toexpand its geographic access as well as to bring additionalproducts to current distributionstreams. In some cases, it is run-ning circles around the competi-tion by using alliances to movequickly into areas where it canextend its product offering with-out costly internal developmentor acquisitions. A good exampleis its relationship with Lipton,where it has beaten back thecompetition from Snapple after Snapple was acquired byQuaker Oats for $1.7 billion. By leveraging each other’sstrengths, Pepsi and Liptonbrought iced tea to the Pepsidistribution network at a signifi-

cant cost advantage over Snappleiced tea, and as a consequence,Pepsi has grabbed market share.

For companies strugglingwith the appropriate role ofalliances in a globalizing indus-try, we have observed many different organization models(Exhibit 17). These organizationmodels are often evolutionary,as companies grow from themodels on the left to the modelson the right. Most organizationsstart in some form of functionalmodel and move eventually intosome sort of matrix organizationwith overlapping functional,product and area organization.While this kind of interdepen-dence can at least get issues onthe table, it tends to fall apart, avictim of its own weight.

The next stage is a corpo-rate strategic business unitmodel, where the productdimension of the model gainssupremacy and reduces overallcost by eliminating the overlapsacross geographies. The lastthree models contain variousmethods of mutual dependencyand interdependency to ensurethat the appropriate trade-offsare being made. The mixed-rolemodel has a geographic dimen-sion in charge in some areas ofthe world and product-line man-agement in others. Gillette isone example of such a company.

The defined role modelhas different elements of thematrix responsible for differentaspects, but it is clear who hascontrol of any single element.

Dow Corning is an example of this model. Most advanced in evolution is the global SBUmodel, with one executive run-ning a global business, holdingarea responsibility, and also pro-viding functional leadership;DuPont is an example of this.The mutual dependency in thismodel keeps everyone in amode of trying to be supportiveof and helpful to each otherwithin the leadership team. Italso avoids the power strugglesinherent in a model where the geographicdimension has a different set of managers than the product-line dimension.

Implications forManagement

Global managers mustquestion the adequacyof the way they do

business today. A new languageof global cooperation hasemerged to address the issues ofthe 1990s. Many companieshave already begun to positionthemselves in this new environ-ment, but they need to “raise thelevel of their game” in the areaof cross-border alliance execu-tion by an order of magnitude.Otherwise, they will face a consortium of competitorswithout the benefit of experi-

Exhibit 17 Forces Shaping Alliances — Globalization of Markets

Global Organization Model Evolution

ence in alliance-building. The important question is

no longer, “Should we form astrategic alliance?” Now thequestions are: “What types ofarrangements are most appropri-ate?,” “How do we successfullymanage these alliances?” and“Are we learning from the expe-rience of ourselves and others?”

Judging from the manyrecently announced cross-borderpartnerships, an increasing num-ber of global enterprises recog-nize that strategic alliances can

provide growth at a fraction ofthe cost of going it alone. Inaddition to sharing risks andinvestment, a well-structured,well-managed approach toalliance formation can supportother goals, such as efficiencyand productivity. Alliances provide a way for organizationsto leverage resources.

We have concluded thatalliances are a winning optionavailable to a wide variety of industries:• The extended-enterprise erahas started, and alliances can be

successful on a global scale.• Allying with competitors isnot something to be afraid of.• The U.S. is catching up butstill behind in implementation.• Companies are recognizingthat alliance-formation skills area core capability and that it isworthwhile to institutionalizethem.

We recommend a disci-plined approach to alliances inorder to help propel companiesto achieve superior results. Webelieve that less-experiencedcompanies can accelerate theirlearning and achieve superiorreturns by actively embracing

we have served before. Sinceour founding in 1914, we havealways considered client satis-faction our most important measure of success.

Booz•Allen & Hamiltonhas extensive experience assist-ing clients throughout the processof strategic alliance formulation,including vision definition,identification of critical capabil-ities, screening for partners,evaluating priority partners,negotiating and implementingalliances. We work togetherwith our clients in three ways tohelp them improve their perfor-mance in alliances:• Process (InstitutionalizingAlliance Capabilities): Assist-ing clients build/improve theirunderlying capabilities in identi-fying, evaluating, negotiating,implementing and managingalliances — based on our bestpractices frameworks andmethodology.• Content (Transactions):Working together with aclient on a specific alliance, atindividual stages in the processor throughout the process.• Alliance Portfolio Renewal:Revitalizing a client’s portfolioof existing alliances by involv-ing the client’s current partnersin an effort to improve perfor-mance of those alliances — bytuning them up and reinvigorat-ing them.

We couple the understand-ing from our industry practiceswith our functional expertise inalliances and our geographicalfootprint to help our clientsachieve superior results in their

alliance efforts.John R. Harbison, VicePresident for Booz•Allen basedin Los Angeles, specializes instrategic alliances, acquisitionsand post-merger integration.

Peter Pekar, Jr., Ph.D., VisitingAssociate Professor at theLondon Business School, is arecognized expert in the area of strategic alliance, with 30years of business experience in forming and managing alli-ances. He has authored morethan 40 articles on alliancesand related subjects and isSenior Advisor to Booz•Allen.

Booz•Allen & Hamilton is a global managementand technology consult-

ing firm, privately owned by itspartners, all of whom are officersin the firm and actively engagedin client service. As world mar-kets mature, and competition onan international scale quickens,our global perspective on busi-ness issues grows increasinglycritical. In more than 75 coun-tries, our 7,000 staff membersserve the world’s leading indus-trial, service, and governmentorganizations. Each member ofour multinational team has asingle, common goal — to helpevery client we serve achieveand maintain success.

Our broad experience inthe world’s major business andindustrial sectors includes aero-space, agriculture, automotive,banking, basic metals, chemicals,construction, consumer goods,defense, electronics, energy,engineering, food service, healthcare, heavy industry, insurance,oil and gas, pharmaceuticals,publishing, railways, steel, tele-communications, textiles, tour-ism, transportation and utilities.

With our in-depth under-standing of industry issues andour expertise in strategy, systems,operations and technology, weassist our clients in developingthe capabilities they need tocompete and thrive in the globalmarketplace.

We judge the quality ofour work just as our clients do —by the results. Their confidencein our abilities is reflected in thefact that more than 85 percent of the work we do is for clients

For more information, contact:

John R. HarbisonVice PresidentBooz•Allen & Hamilton Inc. 5220 Pacific Concourse DriveSuite 390Los Angeles, CA 90045310-348-1900E-mail: harbison_john@bah.com

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