by: Issues: May / June 2003. Tags: Strategy. Categories: Strategy.

Once purely tactical, alliances today have become truly strategic.

During the 1990s, few phrases captured the prevailing hubris and hell-bent-for growth ethos of the times than the phrase, “Done deal.” And during the decade, no type of deal occurred more often than a merger or acquisition. But when the bubble burst, many of the M&As became undone. Today, companies are still doing deals, but perhaps symbolizing the considerably chastened and much more circumspect manager of today, the alliance – a partnership that is much longer and complex to negotiate than an acquisition – has replaced the M&A as companies’ preferred engine of growth.

Once purely tactical (many alliances in the nineties were formed to achieve a single goal, such as increasing sales in a foreign market), alliances today have become truly strategic. (see article in this issue of IBJ Online: “The five factors of a strategic alliance”). Whether it is Dell’s eight-year old alliance with HP (which broke up last fall) or an airline’s entry into a constellation as alliance such as the Star Alliance, companies have very broad and very important (strategic) reasons for forming alliances today.

One of the main reasons why the merger or acquisition has fallen out of favour is their proven inability to create shareholder value. Indeed, two years ago, a McKinsey&Co. study of 160 acquisitions found that 60 percent of the companies involved failed to earn a return that was greater than the annual cost of the capital required to do the deal. On the other hand, a study by The Wharton School, Brigham Young and the University of Michigan found that the stocks of the 500 top global companies and their partners increased whenever an alliance was announced. (These and other studies are referred to in the article, “Equity alliances take centre stage,” elsewhere in this issue). Most compelling, and the reason why alliances have replaced M&As as the preferred engine of growth, is the fact that 1000 of the world’s top companies have found that their ROI from an alliance is 50 percent higher than the return from their core businesses.

But while the business case for forming an alliance is strong, managers need to know that managing an alliance is hardly an example of “point and shoot.” Anecdotal and documented evidence shows strongly that the real work in making an alliance work starts after the deal is done – in managing the alliance. And on this count, many companies – and alliances – are failing. A recently completed three-year study by Vantage Partners, a Cambridge, Mass.-based firm, found that alliance management today is in crisis. The reason, said Vantage partner Jeff Weiss, is that most companies don’t take managing an alliance seriously. (Weiss is coauthor of the article, “The relationship re-launch: How to fix a broken alliance,” elsewhere in this issue).

Managing an alliance is the subject of four of the articles in this issue of Ivey Business Journal Online. I believe that you will find the material in them extremely valuable. I also believe that you will find the relevancy and utility of the information in these articles very high. They, and the other articles in this issue, demonstrate why our editorial goal is “to improve the practice of management.”