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Today's business environment is global in nature, technology based, and characterized by intense competition and rapid change. In order to improve their chances of survival in the marketplace, companies are turning with increasing frequency to strategic alliances with their suppliers, customers and competitors. This innovative approach allows organizations to share skills and resources, develop new products and technologies and gain access to new markets. When there is a good strategic and operational fit between partners, these cooperative relationships can produce mutual competitive advantage.
In providing an overview of the emerging concept of strategic partnering, this publication discusses the potential benefits and associated risks, the importance of careful partner selection, the use of control mechanisms and the measurement of performance.
Introduction
Partnership Objectives
Cost Sharing and Scale Economies
Innovation
Obtaining Market Access
Industry Differences in Partnership Objectives
Partner Selection
Control Issues
Performance Measurement Issues
Introduction
When we think of business organizations, we usually think of competition and competitive, arms-length market relationships. Like Spar Aerospace's John MacNaughton, however, business leaders around the world recognize opportunities in forging cooperative relationships among organizations. These cooperative relationships are called strategic partnerships or strategic alliances.
Strategic partnerships have become more numerous as organizations recognize that it is neither effective nor cost-effective for them to go it alone in all of their activities. This is particularly true in an increasingly global, technology-based economy in which product lives are shortening. Organizations can profit mutually from shared knowledge, skills, manufacturing capacity, distribution channels, and access to markets or technological developments.
Current data on strategic partnership formation in Canada are not available, but other statistics are striking. In North America, Europe, and Asia, the number of alliances doubled between the late 1970s and the early 1980s, and then doubled again by the beginning of the 1990s (Doorley 1993). According to a McKinsey study, joint venture formation between U.S.-based companies and international partners has been growing by 27% a year since 1985 (Sherman 1992)."
As the potential advantages of strategic partnerships become more evident, and as the number of such alliances increases, management accountants indeed, all business people must learn more about them. This paper begins by outlining reasons for forming strategic partnerships. It then discusses partner selection; describes control, performance measurement, and organizational issues; and outlines the potential risks of strategic partnerships. The paper concludes by discussing the role of management accountants in their organizations strategic partnering.
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Partnership Objectives
Many different types of strategic partnerships exist. An organization might form a partnership with its customers, suppliers, or competitors. It might form a partnership with an organization in its own country or at the opposite end of the world. The partnership can be wholly owned by one partner (a contractual agreement) or jointly owned by multiple partners (a joint venture).
In a contractual agreement such as a licensing agreement, franchising agreement, distribution agreement, or technical assistance agreement participants contribute resources to a shared activity, but do not share in the ownership or profits of that activity. For example, U.S.-based Sun Microsystems has licensed its most powerful microprocessor designs to the Dutch electronics giant N.V. Philips, hoping that its chips will be used in new designs of consumer electronics products such as televisions (Lei and Slocum 1991). Avis and McDonalds provide a name, image, and standard business operation to franchisees around the world in return for franchise fees.
A joint venture, on the other hand, is a separate entity that the partners jointly own (through shared equity) and manage. The partners share in the joint ventures profits, risks, and decision making. One partner may be dominant, or the partners may hold equal ownership. However, each partner has only partial ownership and control. For example, Texas Instruments and Hitachi on the one hand, and IBM and Siemens on the other, formed joint ventures to develop and manufacture complex microcomputer chips (Lei and Slocum 1991).
Responsibilities are divided between the players in a strategic partnership. For example, when Quadra Logic Technologies, a small Vancouver-based biotechnology firm, teamed up with pharmaceutical giant American Cyanamid Company, the latter obtained exclusive worldwide marketing and distribution rights to some of Quadra Logics products. Quadra Logic shared sales revenue from these products and received up to $8 million (U.S.) in staged payments for product development. American Cyanamid paid marketing and distribution costs, Quadra Logic paid manufacturing costs, and the partners shared product development costs equally (Investing in Canada 1990). Different types of strategic partnerships exist for various reasons. Research, however, indicates that partnerships satisfy three broad categories of objectives (Hagedoorn 1993, Hergert and Morris 1988, Larson 1991): cost sharing and scale economies, innovation, and market access.
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Cost Sharing and Scale Economies
Technological research and development (R&D) and market R&D are often costly, lengthy, and risky. A partnership that allows more than one firm to share in these costs and uncertainties is a particularly appealing arrangement. A project might require more capital than a single organization can afford. An organization with excess capacity might profitably manufacture components, subassemblies, or finished products for another organization lacking adequate capacity.
Outsourcing arrangements, in which an outside organization performs activities previously conducted in-house, can be strategic partnerships. In this situation, scale economies can be gained because the outside organization performs these activities on a much larger scale, for multiple organizations.
Besides the partnership between Quadra Logic and American Cyanamid, several strategic partnerships have been formed in Canada, including the following:
· Delrina Technology, a Toronto-based software products firm, needed capital for expansion, but banks were reluctant to lend the company any money because of the intangible nature of its software. Because IBM already sold Delrina products to its customers through a marketing partnership, it was in IBMs interest for Delrina to continue to innovate. To give Delrina the necessary capital, IBM acquired 11% of the company for $1.9 million. This capital infusion allowed PerForm, Delrinas software for designing business forms on personal computers, to capture a 70% market share (Lorinc 1991).
· Grand & Toy entered into formal partnerships with selected suppliers in order to decrease supply costs (Mason 1993). Its agreement with Acco, a Toronto-based office supplies company, allows Grand & Toy to reduce inventory levels while Acco guarantees delivery. The two companies share data and a forecasting system, which reduces handling costs.
· High-technology firms, such as Northern Telecom and Hewlett-Packard, are subcontracting out more of their plastics manufacturing instead of doing it in-house (Turriff 1993). Indeed, Hewlett-Packard has closed two of its three North American molding facilities in order to subcontract to world-class molders. The company selects subcontractors based on such criteria as quality programs, tolerance requirements, turnaround time, lead time, and cost competitiveness. Sub-contractors benefit in turn from closer relationships with their customers.
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Innovation
Technological developments are often complex, draw from several scientific fields, and occur more rapidly than ever. How can one organization obtain and retain all the technological knowledge and expertise it requires? Through a partnership, the organization can seek out technological opportunities, share technologies, and jointly develop technologies. Partnerships can also support innovation by offering integrated products or services that the partners used to sell separately.
Many strategic partnerships have been formed in Canada to foster innovation, including the Delrina/IBM and the Quadra Logic/American Cyanamid examples. While one objective for both Delrina and Quadra Logic is to obtain capital, a main objective for IBM and American Cyanamid is product innovation. It is in the larger companies' interest to have the smaller firms continually innovate and develop their product lines. Other strategic partnerships formed to foster innovation include the following:
Bell Canada and eight other telephone companies formed the Stentor telecommunications alliance in 1992 in order to provide seamless services across Canada for non-residential customers (Bagnall 1993, DCruz 1993). National account teams drawn from different telephone companies have been set up for each major account in order to improve service. A subsequent alliance between Stentor and U.S.-based MCI Communications gives customers seamless transborder service.
Canadian National Railways formed strategic alliances with two major American rail companies in order to speed up freight service. Before the partnership, if a shipment had to be carried over multiple railways, it took the company up to a weeks worth of phone calls in order to quote a price to the customer. Under the new arrangement, the originating railway is authorized to set a price (Pricing deal 1991).
Five major Canadian steel companies and the Industrial Materials Institute formed a strategic partnership to jointly research and develop a new commercial technology. Steel companies worldwide are competing to develop this technology, which would allow them to produce high-quality steel more cheaply (Steel firms 1992).
IBM has entered into strategic partnerships with customers such as Citibank to implement such sophisticated technologies as image processing systems.
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Obtaining Market Access
For some industries, particularly high-tech ones, the domestic market alone may be extremely limited. These organizations must look for customers outside of Canada. In order to obtain the knowledge and skills they need to enter new markets, organizations are forming strategic partnerships. According to a survey of American firms, forming a strategic partnership was a far more common way to expand geographically than through other means such as direct exporting, acquisitions, and start-ups (Hung 1992).
Many Canadian firms are forming strategic partnerships in order to enter markets all over the world. For both Delrina/IBM and Quadra Logic/American Cyanamid, market access was an objective of the smaller firms. Other partnerships formed to gain market access include the following:
In order to reach Mexican customers, Canadian confectioner William Neilson Ltd. reached a distribution agreement with Sabritas SA, a wholly owned Mexican subsidiary of PepsiCo. Sabritas well-developed distribution system of refrigerated warehouses and trucks delivers snack foods to 450,000 retail outlets throughout Mexico. Sabrita’s wanted to add chocolate bars to its product line; Neilson wanted to penetrate Mexico’s rapidly growing economy and population of 80 million people (Bertin 1993).
A strategic partnership often has multiple objectives, as in the cases of Delrina/ IBM and Quadra Logic/American Cyanamid. Another example of a multiple objective strategy is the proposed partnership between Canadian Airlines International and American Airlines (Enchin 1992). Such a partnership would yield cost sharing and efficiencies. Both carriers could share airport ground services and obtain greater purchasing power in acquiring aircraft. A partnership would also improve innovation of products and services through an integrated routing and baggage system, an integrated frequent flyer program, and preferred rates over other inter-airline fares. Canadian would gain access to Americans highly vaunted information technology. Finally, because Canadian has already penetrated the fast-growing Asian market, a partnership would increase Americans access to that region much more quickly than if it attempted to secure landing rights separately to each major Asian airport.
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Industry Differences in Partnership Objectives
A study of 10,000 cooperative agreements around the world found that strategic partnerships are formed for various reasons depending on the particular industries involved (Hagedoorn 1993). Across all industries, however, the three most common strategic objectives for forming partnerships were:
· to create new, complementary technologies by sharing expertise and gaining economies of scale through joint research efforts;
· to learn new technologies (by technology sharing or transferring) in order to shorten the product life cycle; and
· to enter new markets or restructure current markets.
For many high-technology industries, the most prevalent objective for creating strategic partnerships is to create new technologies. These technologies are extremely complex and require specialized technical competencies. Strategic partnerships allow these industries to gain access to different skills and share the costs of skill development.
Shortening product life cycles is the second most common objective of strategic partnerships for many industries. In this case, instead of undertaking joint technology development, one partner learns a technology from another partner through, say, technology transfer.
Mature industries that are based less on technology automotive, chemicals, consumer electronics, food, and beverage form strategic partnerships most often in order to improve market access. Market access is also important for the telecommunications, computer, and microelectronics industries, especially with the lifting of national restrictions that barred entry to these markets, in favor of large public utilities (Hagedoorn 1993). Thus, as the business environment of an industry changes, the objectives of strategic partnerships in that industry are likely to change too, as new opportunities present themselves.
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Partner Selection
The key to a successful strategic partnership is partner selection. Research shows that organizations should select partners according to fit (Harrigan 1988b, Niederkofler 1991). Thus, the strategic objectives of the partners should coincide. While these objectives need not be identical Delrina and IBM had different objectives for their partnership they must be mutually consistent. Fit also means that the partners can make the partnership work on a day-to-day basis. In order for this to happen, the partners’ cultures must be compatible: expectations must mesh and partners must be on the same wavelength (Forrest 1992, p. 28).
Research also shows that a strategic partnership is more likely to succeed when its core activities products, markets, technologies are somehow related to the core activities of both partners. Diversifying partnerships that are unrelated to both partners' activities are less likely to succeed, probably because less expert knowledge is available and because managers will likely pay too little attention to the partnership.
Partners need not be the same size for the partnership to succeed. Many small Canadian firms have formed effective partnerships with international giants. However, partners should recognize that large and small companies operate differently. Delrinas president once said: Our concept of time and urgency is quite different from IBMs. They’re such a huge company, it takes a lot to get their attention (Lorinc 1991, p. 36). Similarly, the chairman of Zenon Environmental Inc., a Burlington, Ontario-based supplier of environmental products and services, said: Weve dealt with a lot of big companies and you have to be careful because they tend to suffer from arterial sclerosis. If they decide to reorganize, for example, it could delay the venture two years or so. You're not a high priority, so you get put on hold. There is some danger in terms of response time (Edur 1992).
Partner selection is usually an incremental process during which two arms-length organizations experiment to determine whether a relationship will work (Larson 1991). This trial period, which may not even involve formal written contracts, allows prospective partners to:
· learn more about each others businesses;
· demonstrate performance capabilities;
· establish systems and procedures for communicating information;
· establish informal and formal rules for how day-to-day operations are carried out; and, most importantly
· evaluate each others trustworthiness.
The trial period shows the organizations where they will have to make any adjustments in order to make the partnership work. For example, the distribution agreement between Neilson and Sabritas was preceded by a four-month pilot test in Mexico. The test gave both partners information about which products would be most successful in Mexico, and which product characteristics, such as sizing and packaging, might have to be modified for that market (Bertin 1993).
The key objective of the trial period is to determine whether mutual trust can be established. In her study of successful partnerships, Larson (1991) found several important aspects of trust: confidence that a partner can be relied upon (for example, to deliver results, or to protect proprietary information); confidence that a partner will not exploit the relationship; confidence that a partner will make extra efforts to fulfil responsibilities; and confidence that a partner will provide time and opportunity for the other partner to adjust to new business conditions. Potential partners should also make every effort to establish and maintain their own trustworthiness. Trust is important in a strategic partnership and takes a long time to build up, but it can be quickly destroyed (Niederkofler 1991).
Many prospective partnerships will not survive the trial period. After a successful trial period, however, operations between the two organizations will have probably become routine, and the partners will have more knowledge upon which to base a formal relationship (Larson 1991).
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Control Issues
How are strategic partnerships managed and controlled? The answer is actually found by answering three more pointed questions (Geringer and Hebert 1989):
I. Over what activities does each partner exercise control?
II. How much control does each partner exercise? And
III. How does each partner exercise control?
Determining what activities are controlled by each partner defines the scope of control. It is usually more effective for a partner to exercise selective control over a few key activities than to try to control all the partnerships activities. For example, a partner might participate heavily in recruiting and training partnership staff: hiring and training the right people means there will be less need to monitor their decisions.
Deciding how much control each partner exercises defines the extent of control. The extent of partner control of the partnership can be assessed by examining the degree of autonomy and decentralization that the partnership has in making decisions, and who is involved in making these decisions. Another important question to address is whether the partnership manager can make certain decisions without the partners input.
Determining how each partner exercises control defines the mechanisms of control. Some mechanisms encouragement of teamwork, implementation of a particular budgeting system, shared responsibility for partnership planning is used to promote certain behaviours. Other mechanisms, such as formal agreements, veto rights, and approval requirements, are used to prevent certain behaviours (Geringer and Hebert 1989).
Control can be exercised by both direct and indirect mechanisms. The major direct control mechanism is the partnership agreement. According to a recent study, a primary reason for partnership failure is that too little attention is paid to the details in this agreement (Forrest 1992). In a high-technology field, for example, ownership of intellectual property must be spelled out for all foreseeable situations. Other issues generally included in the agreement are: the objectives of the partnership; the resources to be committed by each partner; how the partnership will be staffed and managed; ways to resolve conflict; the authorization needed for particular decisions; milestone delivery dates; non-disclosure agreements; built-in renegotiation points; and exit terms (Forrest 1992).
A strategic partnership can also be controlled by indirect mechanisms. Human resource management is particularly interesting here, since personnel policies can sway managers priorities (Geringer and Frayne 1990). A partner can affect partnership activities by influencing:
· how key positions are recruited for, staffed, and replaced, according to candidates quality, experience, interests, and objectives;
· what skills are taught, what aspects of performance are examined, and what particular values and norms are promoted;
· how, and how often, performance appraisals occur, and how the resulting evaluations are used; and
· how individuals are compensated for their contributions to the partnership, through salaries, benefits, bonuses, and promotion opportunities.
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Performance Measurement Issues
How does one measure the performance of a strategic partnership? Measuring partnership performance is an essential activity for both partners, but can be difficult to do (Anderson 1990).
The partners may assess performance in their own organizations differently, and may differ on what constitutes an acceptable performance measurement system. They might have to compromise in order to agree on an appropriate performance measurement system for the partnership.
A second difficulty with measurement is that the performance of the partnership differs from the performance of each partner. Indeed, the partnership may succeed at a partner's expense by, for example, making a product that takes away the organizations market share. Alternatively, one organization might reap most of the benefits from the partnership. For example, General Motors and Fujitsu Fanuc formed a joint venture to design and manufacture robots and flexible automation systems for the automobile industry. Because General Motors was unable to learn the required skills, it now does little more than distribute the robots (Lei and Slocum 1991). The performance of this partnership will be viewed differently by its partners.
Finally, partnership performance is difficult to measure because strategic partnerships are often used in situations in which outcomes are difficult to measure. For example, partnerships are often used for operations that are more long-term, dynamic, and risky than the internal operations of their partners. If long-term revenue projections and uncertainty cannot be reasonably estimated, then internal performance measurement systems (typically based on discounted cash flow analysis) may not be appropriate. Organizations often form partnerships in order to keep open a potential market or technological option, with a firm decision to be made only in the future making the partnerships performance difficult to evaluate.
Many criteria used to evaluate organizations can be considered inputs rather than outputs (Anderson 1990). For example, morale and innovation can be considered basic requirements for effective performance, rather than just the consequence of effective performance. As poor inputs will likely lead to poor outputs, Anderson suggests that the input measures are good indicators of the partnership's long-term effectiveness. However, input measures are more difficult to assess and quantify than output measures.
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