by John DePuy

Twenty years ago, many of our hardware-bound forefathers were committing their companies to an opposing strategy. Vertical integration. Since then, much time has been spent undoing those misguided attempts to create conglomerates. Why then, should today's executives not believe that the "strategic alliance" is simply another bad idea.

To begin with, it seems to us that vertical integration was abhorrent to the American way of doing business right from the start. Doesn't that concept conjure up visions of red tape, bureaucracy, empire-building and monopolies? We think so. It wasn't natural for U.S. businessmen to do all things for themselves or be all things to all customers. Yes, it's true, some of us business people are loners. We truly cherish our independence - until we can't go on without something we haven't got, like money, resources, larger factories or worldwide distribution. Once desperate, most of us are willing to scramble frantically looking for a partner on a white horse. That's okay, it's also a natural instinct to seek allies, to be interdependent - but necessity doesn't have to be the driving force.

It also seems to us that the strategic alliance comes naturally to most Americans, and easily to most business people. It's part of out heritage. There was the alliance with the French to win the American Revolution, alliances with railroad pioneers to open up the Far West, and, yes, even alliances with sheiks when we needed oil badly enough. Those were win/win deals, or fair exchanges - and that's what sets strategic alliances apart. Whenever it's found, good strategic alliance is a sure sign that a fair deal has been struck. That's why the signing of strategic alliances are nearly always accompanied by lots of hand shaking, and happy faces. It's distinctly American, almost patriotic, and certainly tons of fun to cut a fair deal, especially if you've obtained what you needed most.

But, the strategic alliance is not a guaranteed remedy for what ails your company. Like vertical integration, the strategic alliance is often vastly over-rated. The time spent investigating many opportunities can be a total waste. And who hasn't had the unfortunate experience of teaming up with a partner in haste, and paying a high price to end the deal. So, you better make sure that you kn ow how to spot a bad partner early on in the engagement, that you know what a fair deal really is, how to structure it, and how to terminate the relationship whenever the "bargain" turns out to be a cultural shock, a financial pain or a drain on you resources.

What's at stake here may well be a company's best chance for success. More about that later. But right now, let's make sure we're all reading from the same dictionary. We hear a lot about joint ventures, partnering and strategic alliances. What's the difference, if any?

A strategic alliance is usually a partnership between two or more firms which involves the sharing of complementary disciplines, technologies, products, organizational structures, marketing channels or other resources which would otherwise not be available to either of the partners. Such alliances are struck, for example, to gain access to new markets; channels of distribution;technology, patents or products; research/development or manufacturing capabilities; customer service/support networks; or working capital. One or more of these resources are exchanged between the two partners in such away that the goals of both firms are met. Sometimes these arrangements are referred to as "partnering arrangements" or as "joint ventures", and, indeed, may be so, at least figuratively speaking, but a true "partnership" implies that both participants have agreed to make equal contributions, take equal risks and share equally in the returns. In most strategic alliances, the factors involved are not equated easily if at all. Either or both parties are usually seeking to obtain a distinctly different set of objectives, and the returns will be obtained and measured in different ways. Similarly, a "joint venture" is one in which two firms typically agree to fund, on a more or less equal basis, the development of a separate entity, project or program. Again, the implication is that the participants are more or less equal. In most strategic alliances, just the opposite is true; one firm is usually much larger, but, like its smaller ally, the bigger firm wants something it can't otherwise obtain in an economic manner. And, in structuring the alliance, both participants must achieve their objectives otherwise, the alliance is doomed. Obviously, then, if a small company is struggling for a new sales level or straining to meet unexpected demand - a strategic alliance may be the solution. Maybe you've been pondering such a move? If you haven't, maybe you should. A good alliance, like a partnering relationship with suppliers, is often synergistic. Just ask a Japanese company executive. During the last 20 years, the Japanese honed their competitive edge by striking cooperative relationships with vendors and suppliers that reduced manufacturing costs, improved quality and ensured just-in-time delivery. It was and still is one of the major reasons why Japanese firm are such awesome competitors. A strategic alliance or two may sharpen your ability to compete and insulate your bottom line against the vagaries of the market. And, if you'd like to move or shake the world a bit, it could be the long lever and the place to stand you've been looking for.

  John De Puy is President of Oaktree Ventures, Inc., a San Diego-based consultant to top-ranking executives of small and medium-sized software companies.


Copyright 2009 Oaktree Ventures, Inc.
The Oaktree Consulting Group of San Diego