Strategic Alliances – Part two

Compoundings Magazine

November, 2001

 By Thomas F. Glenn, Petroleum Trends International, Inc.

and Kevin J. Fiala, Bywater Corporate Development

This two-part article, written by PetroTrends and its alliance partner Bywater Corporate Development Services, provides information on what alliances are and how independent lubricant manufacturers can use them to grow their businesses. Part I, appearing in the October issue of Compoundings, focused on the concepts of alliances. Part II bring the issue home, and speaks directly to how independent lubricant manufacturers can make alliances work for them. 

As discussed in Part I in this series on alliances, the lubricants business has changed significantly over the last decade and more change is on the way. These changes have and will continue to present both challenges and business opportunities for independent lubricant manufactures. Strategic alliances provide independents with a flexible, relatively low risk and cost effective strategy to use in pursuit of some of the business opportunities in today’s market.

Two of the most common reasons for forming alliances are to accelerate growth and to gain access to core capabilities. They offer particularly attractive solutions to independent lubricant manufactures when there are strategic gaps in critical differential capabilities that are too expensive or will take too long to develop internally. The following represent just some of the alliances that have been consummated and/or explored by independent lubricant manufactures:  

Lube manufacturer with filter manufacturer to fill product gap – A lube manufacturer has established a strategic alliance with a filter paper manufacturer to better serve its industrial customers. By providing a product that can be customized to suit its customers’ specific needs, the lube manufacturer establishes a differentiator and another way to keep competition out.

Lubricant manufacturer with another lube manufacturer to fill geographic gap – Given the competitive nature among many of the independent lube manufactures, there are a limited number of examples of two blenders partnering. However, there are cases where two manufacturers from different geographical areas partner to bid on a larger regional account.

Lubricant manufacturer with environmental clean-up company to fill service gap – Working in conjunction with its alliance partner, a lubricant manufacturer can offer waste oil disposal and hazardous chemical clean-up services to its customers.

Lube manufacture with another lubricant manufactures to fill product gap – Brand XYZ distributor has a customer that wants ABC’s brand of oil. In these cases, XYZ distributor can partner with an ABC brand distributor, typically out of XYZ’s geographic market, to fill the customer’s need. These alliances typically involve synthetic lubricants and other specialty lubricant products.

Lube manufacturer with a lubricant distributor – Lubricant distributor interested in reducing its dependence on a consolidating pool of major suppliers allies with an independent lubricant manufacture to obtain a private label product. The independent benefits from the business and may have an opportunity to the leverage distributor’s distribution network.

Lube manufacturer with an equipment management company – An independent lube manufacturer forms an alliance with an equipment management company in an effort to leverage its access to channels and its customer’s reliance on them for product recommendation. In return, the equipment management company benefits from the lube manufacturer’s expertise, product development and trouble shooting capabilities.

Lube manufacturer with an original equipment manufacturer (OEM) – Alliance can assist equipment owners optimize component life and machine uptime. Typically includes predictive and preventive maintenance programs, technical service, fluid management and other lubricant and engineering related services offered jointly by the OEM and lube supplier.

In addition to the types of alliances highlighted above, alliancing opportunities exist in: 

• Packaging
• Laboratory services
• Toll manufacturing
• Chemical management
• Cleaning products and other lubricant related products
• Transportation management
• International trade partners

Now that we have highlighted just some of the destinations alliances can take us. The next questions is what is the best way to get there and how?

OVERVIEW OF APPROACH TO ALLIANCING

Past experience suggest that the journey of alliancing must begin with a clear business need for all parties, that a set of shared goals and shared values must be agreed upon, that an integrated planning process is employed, all of which is underpinned by a common measures model. These concepts are the foundation of the PetroTrends-Bywater approach to establishing winning alliances that deliver step changes in performance. Figure 1 provides an overview of our Five-Step approach. A sampling of key activities in each Step of our alliancing process is revived in the remainder of this article.

 
STEP 1: EVALUATING THE BUSINESS CASE

In the 1990’s, General Motors Corporation made headlines by demanding double-digit price cuts, breaking long-term contracts and sharing information with rivals in a quest for lower bids. It focused on price alone with its suppliers – it ignored total costs. In the end, GM polarized its suppliers and lost market share.

Companies so often claim to want to get closer to their suppliers and customers, but when asked if they’ll share information or amend their strategy, they say that they cannot trust the other party in doing that. This is especially true when the potential alliance partner is also a competitor, as is the case with many ILMA members. (Note that an estimated 50% of alliances in existence today are between competitors.) The difficulty of marrying two corporate cultures has even led one U.S. corporation to amend its policy: ‘We don’t do alliancing any more – we never get the benefits we know are there. If they’re strategic we buy them.’

 Summary of key activities in Step 1:

n        Clarify the compelling business need for developing an alliance partnership.

n        Assess how the project or contract fits with potential alliance partner’s strategies.

n        Assess the prevailing cultural norms and operating style of potential alliance partners – cultural profiling (see Figure 2).

n        Select partner or partners

STEPS 2 & 3: TRANSFORMATION DESIGN AND PLANNING & JOINT IMPLEMENTATION PLANNING 

If where you are trying to get to with the alliance is clear – the shared goals – the planning is the task of saying what you will do to get you there. It has two elements: 

n        Known Problems (Incremental Change): Involves listing down all the known areas of difficulty or problem, and then defining what would be needed by all parties to put these problems right.

n        Unconstrained Opportunities (Step-Changes): Like the supplier who says he’ll move his factory and put it next to the customer. Or the customer that bases his QA staff at the supplier’s factory. Or where R&D of the two firms is merged together.  

What is important about the planning process is that it is open, done jointly, and that known problems and unconstrained opportunities are discussed separately. If not, the debate quickly reverts to the known, rather than searching for the greater potential that is the unknown. 

But what type of improvements are we talking about? The types of areas that need to be reviewed in the planning process are shown in Figure 3.

Alliancing, like any change program, needs early wins to provide confidence to both parties that this was a good route to go down. As shown in Figure 4, prioritizing the opportunities identified by the planning process, and then using that as the basis to set out a joint action plan ensures some of the “low hanging fruit” is picked first, before setting off up Mount Everest together.

Summary of key activities in Step 3: 

n        Develop a common vision built upon the individual aspirations of each alliance partner and upon shared goals and values.

n        Assess gaps in the cultural profiles, performance standards, values and behavioural norms that need to be addressed.

n        Develop clear performance targets for the project or contract and commit to actions.

n        Translate stretch targets into a series of detailed plans.

n        Develop joint organization structures for the project or contract and plans to deliver the targets.

n        Develop joint delivery processes.

n        Agree risk and reward structure and the relationship management process.

n        Develop a series of shard performance measure and a common measurement system.

STEPS 4 & 5: IMPLEMENTATION & EVALUATING RESULTS

If measures are the glue that holds organizations together, then their importance when dealing with multiple companies is even greater. If shared goals, values and actions have been agreed, the only way to keep the alliance on track is to measure progress towards them. However, the construction of a measures model for an alliance is subtly different to that of a company. The purpose of a particular alliance tends to be far more focused than that of a company. Where a Balanced Scorecard approach is extremely useful for firms, it can lose the overriding strategic imperative in an alliance.

Take an R&D alliance in the aerospace industry. It exists to design a new plane within a certain cost and timeframe. Another example is a topside alliance in the oil industry. Its primary aim is maximum production (topside efficiency) for minimum operating cost. That’s it. The operator of that oil platform may have many other considerations. And they have the whole asset to think about, not just topside. But for the alliance, it is those two strategic measures that matter. 

Therefore, we have found that a cascade measures model driven from the two or three strategic measures defining the purpose of the alliance is most effective, as shown in Figure 5. Lower level measures, which link root-cause elements to the strategic goals are then the order of the day. But keeping the whole thing simple and focused is the absolute key to success. As is, of course, all parties viewing those measures in the same way from the same data. 

Summary of key activities in Steps 4 & 5:

n        Install the common measurement system.

n        Follow up on key personnel to ensure data is routinely gathered to populate the common measurement system.

n        Monitor progress and effectiveness of implementation plans.

n        Conduct regular performance reviews against the targets to drive out improvement actions.

n        Develop an effective and practical process for capturing lessons learned and concluding key phases of the project or contract.

n        Enable constructive feedback and sharing of the learning amongst the alliance partners.

n        Implement facilitated assessments with each participant.

n        Employ joint workshop with both departing and remaining partners. 

LESSONS LEARNED

Based on past assignments and research conducted by PetroTrends and Bywater’s on alliancing, we have summarized some of our key learnings below. The learnings are segmented into five categories and each of these categories is plotted by “Difficulty to Achieve” and “Importance to a Successful Alliance” in Figure 6.

 1.  Business Need

n        Identified as the most important pre-requisite for a successful alliance.

n        Tends to be a subjective debate amongst participants.

 2.  Effective Measures

n        Identified as the most difficult area.

n        Must be clearly linked with the shared goals and planning activities for the alliance.

n        The cascaded measures model is far more effective than the balanced score card approach.

 3.  Shared Values

n        Identified as difficult to achieve but not so important.

n        Experience shows most failures occur where values are miss-aligned.

4.  Shared Goals

n        Identified as a medium priority in the importance matrix.

n        Joint goal setting workshops with alliance partners have been successful mechanism.

 5.  Clear Plan with Actions

n        Leadership structure is important.

n        Link between activities (making it happen) and the plan is the most difficult area.

n        Building trust between participants is critical.

n        Participants need a structure to openly share known and historic problems.

n        Participants bring baggage and need help to leave it behind.

n        Most participants are both unfamiliar and uncomfortable with step change planning and need structure and support.

n        Forcing step change planning really tests commitment to the business case.

n        How to enable step-change planning when most participants are grossly uncomfortable with it?

ALLIANCING CHECKLISTS

Whether you are about to embark, are on the road, or just pulling in for your first pit stop, the critical factor in alliancing is recognizing it is a journey, not a one off project. And to embark on a journey, one must have a map, and have shown it to fellow travelers. As with all journeys, you are never quite sure what you will find along the way, even if you have a clear view of where you are heading. That is why establishing mutual trust, understanding and confidence with your fellow companions is key before ever setting off. And if you do decide to set off, PetroTrends and Bywater Corporate Development Services hope the planning checklists below are helpful to you.

Choosing a Partner

o Is the proposed alliance activity or process strategic in nature?

o Have you conducted a capability assessment of all potential parties? Have you picked the winner?

o For your chosen partner, have both companies done a cultural assessment to identify areas of difference?

o Is there a clearly identified business need for both parties?

o Has a business case been constructed which identifies the benefits of the alliance?

o Do both parties have similar experiences of alliancing? Is there a common level of maturity?

o Would you hire their managers to run your business?

 Ready to Go?

o Do you have a set of shared goals?

o Do both parties have a common view of success and failure?

o Have you developed a statement of values which dictates how you will work together?

o Is the measures model built?

o Have you agreed how you will report and review progress towards these measures?

o Have you defined the organizational structure of the alliance?

o Have clear stretch targets been set which align to both companies’ corporate strategies?

o How would you rate the trust you have in your partner on a scale of 1 to 10?

o Have you agreed how to share the losses if something goes wrong? 

On The Road

o Do you have a mechanism for escalating problems which cannot be resolved within the operational alliance structure?

o Are you focused on delivering some quick wins?

o Do individuals in both companies get rewarded on alliance performance or parent company performance?

o Is there an effective communications process being used?

o Has integrated planning become the way of setting direction, or do both firms plan separately?

o Are there clear milestones and objectives which are regularly reviewed?

o Is there a mechanism for a pit-stop, i.e., a chance to stand back, take stock, and then drive forward again?