Strategic Alliances – Part One
Compoundings
Magazine
October,
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 focuses 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.
The lubricants business
continues to move through a period of unprecedented change.
One of the most significant changes, and certainly the one
expected to have the most profound impact on the market, is
consolidation. The number of major lubricant manufacturers has
shrunk from 14 to 9 in less than 10 years. Virtually all of
the consolidation has been the result of mega-mergers and more
are expected.
In addition to the impact of
mega-mergers, the lubricants industry is being reshaped by the
Internet, increasingly challenging lubricant performance
specifications, new engine technology, step changes in base
stock manufacturing technology, fill-for-life and extended
drains, globalization, a softening economy, and other issues.
With these changes come significant challenges for independent
lubricant manufacturers. Independents are faced with more
intense competition, compressed margins, fewer choices in base
stock sourcing, and escalating costs, to name a few. But the
changes also open the doors of opportunity for independents,
and strategic alliances offer the keys to opening some of
these doors.
Strategic
alliances are often a much more flexible, less risky and more
cost effective strategy for independents lubricant
manufacturers to pursue when venturing into new markets and
products/services, and for broadening ones knowledgebase and
improving performance than are traditional mergers and
acquisitions. They
offer particularly attractive solutions when there are
strategic gaps in critical differential capabilities that are
too expensive or will take too long to develop internally.
Two
of the most common reasons for forming alliances are to
enhance growth and to gain access to core capabilities. And
for these reasons, strategic alliances are being used widely,
and at an accelerating rate. According to a recent
survey by consulting firm Booz-Allen & Hamilton, more than
20,000 alliances have been formed worldwide in the last two
years alone. In addition, more than 20% of the revenue
generated from the top 2,000 US and European companies now
comes from alliances, up from about 5% in the early 1990’s,
with more predicted in the near future.
What
they are and are not…
Forming successful business alliances
starts with understanding what alliances are, and what they
are not, and how they differ from mergers and acquisitions,
key account management, and outsourcing.
A simple way to differentiate alliances from other
business relationships is by looking at The Bywater
Relationship Matrix in Figure 1 – a tool for evaluating
how two companies trade with each other.
Whether you call it an alliance or a partnership, a
useful definition for what alliances are is explained by Kevin
Fiala, principal of Bywater Corporate Development Services as
“The seamless operation of business processes to best apply
the competence of partners for shared gain.
Fiala notes “alliances typically form when one
company alone can not effectively fill the gap in serving the
needs of the marketplace.”
Alliances are
fundamentally different from acquisitions and require a
different level of understanding. Fiala draws from Bywater’s
experience in both alliances and acquisitions, and notes,
“while achieving control, acquisition brings to the buyer
all parts of the acquired entity – both strengths and flaws
– while alliances match strengths and balance control with
collaboration.” As The Bywater
Relationship Matrix shows, however,
alliancing and acquisitions are not the only type of business
relationships. Perhaps the other most talked about model is
that of outsourcing. Rather
than debating which approach to a business relationship is
best, however, PetroTrends and Bywater’s research on
alliances has shown that alliances and outsourcing each have
its place. The key question, therefore, is which one to use
and when. A simple way of looking at this is to consider the
strategic importance of the activity in question, and the
firm’s competency to deliver it. This approach, shown in
Figure 2, demonstrates that outsourcing is a potential
relationship type in the preferred supplier category.
The best way to separate those
candidates for outsourcing, as opposed to alliancing, is to
consider their core role. For outsourcing, think managed for
cost. For alliancing, think managed for value. Outsourced
activities tend to be tactical in nature, of low complexity,
for which there are many providers. In the lubricants industry
an example of this could be an independent lubricant
manufacturer providing contract blending/toll manufacturing
for a major lubricant marketer. Alliance candidates, on the
other hand, are those where the supplier has a direct impact
on the strategic priorities of the buyer’s business, and
where the mutual trust and knowledge required by the supplier
to add real value to the customer cannot be replaced easily.
There are many cases of companies trying
to go down the alliancing route with suppliers they should
really be looking to outsource to.
Similarly, and more significantly, firms have
outsourced activities that were strategic. Only later, do they
find that their strategic objectives cannot be achieved,
because they have lost the ability to direct activities that
are needed to support them.
The
Business Need
Identifying the business need for an
alliance is the single most important, yet often most
overlooked factor in determining the success of an alliance.
The process of overlooking this pivotal issue typically plays
out when one party – a customer for example, proposes an alliance. A
supplier then agrees to enter into an alliance because they
“feel” it’s the right way to go or because “it’s
their customer” and there doesn’t seem to be an acceptable
alternative response to the invitation. All to infrequently do
suppliers enter into an alliance because they too see a
compelling business benefit. Based on research conducted by
PetroTrends and Bywater’s on alliancing, there are 24
critical factors for success in alliancing. Identifying and
understanding the business need for the alliance is at the top
of the list. As a result, before setting off on the alliancing
journey, each potential participant needs to critically ask
the question: Why am I doing this? There must be a clear
understanding of what the business need is. For example:
- Developing new markets,
products, or services
- Accessing
new product innovation
- Funding
constraints
- Broadening
knowledgebase
- Reducing
cost
- Controlling
channels of supply or sales
- Locking
competitors out of a relationship
The
other question to ask, before pulling away from the start line
is: Am I ready, and are they? Distilling the lessons learned
from alliancing experience in a variety of industries leads to
a list of essential prerequisites for alliancing to succeed,
as shown in Figure 3.
Adding to the prerequisites for success, we
have found that alliances are most often driven by individuals
and work best when not overly complicated. The principles of
most alliance can be captured in two or three pages,
frequently in a document as simple as a memorandum of
understanding (MOU). Alliance agreements that consists of 20
pages and full of legalize frequently suggest underlying
questions of trust and/or clarity of purpose.
Complicated agreements are all too often doomed for
failure before the ink dries.
No
pain, no gain…
Alliancing is also about shared pain to deliver
shared gain. So before the pain starts, a foundation of shared
goals and shared values is needed to assure shared gains.
There are many ways to develop the shared goals. The single
most important test of those stated goals, however, is that
they fully align back to the goals of the individual
organizations. Which often make each company’s strategic
plan a good place to start in identifying shared goals.
By having each company write on one sheet of
paper their objectives and critical success factors (for the
company, not the alliance), a
“checklist” is created to ensure goal congruence.
If the two statements of purpose are then brought together,
areas of common interest, and conflict, can be identified.
From this basis, a set of truly aligned goals can be developed
for the alliance, which can lead to concrete targets.
Shared values is a topic which all too
often goes into the “too difficult” box, and yet is
probably the single greatest reason why alliances do not
deliver the value they should. A cultural assessment is a good
place to start. After all, if an entrepreneurial firm is
trying to Tango with a hierarchical firm doing the Foxtrot,
it’s good to know that up front.
So,
What Next?
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, you must
have a map, and have shown it to your 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.
Part II of this series on alliances will
speak to some of the destinations an independent lubricant
manufacture can travel to.
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