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Questions to ask before building a strategic alliance

Edited exerpt reprinted from the book Network Advantage: How to Unlock Value from your Alliances and Partnships, by Henrich Grever, Tim Rowley & Andrew Shipilov. Copyright © 2014 John Wiley & Sons Ltd. All rights reserved

Edited excerpt reprinted from the book Network Advantage: How to Unlock Value from your Alliances and Partnerships, by Henrich Grever, Tim Rowley & Andrew Shipilov. Copyright © 2014 John Wiley & Sons Ltd. All rights reserved.

Evaluate strategy fit

Strategy fit implies the degree to which the partners have complementary strategies. This means that the collaboration should help both companies achieve their own long-term goals, but it should not make either firm a powerful competitor in the other firm's markets in the long run.

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As an example, let's look at the relationship between Grundfos, the world's largest pump manufacturer based in Denmark, and Viessmann, the German-based maker of heating systems. If you're a European consumer and you have an advanced gasheater in your house, chances are it's made by Viessmann and it runs using a pump, sensor, or motor made by Grundfos. Because Grundfos specializes in making these components, it's very good at it. Viessmann specializes in the assembly of gas heaters using components from different suppliers like Grundfos.

However, Grundfos is unlikely to start assembling gas heaters because its know-how is limited to making pumps and associated electronics. Viessmann is unlikely to start making advanced pumps because it lacks the know-how in that domain. Viessmann built strong brand recognition among consumers over time by making high-quality products and sponsoring major sporting events such as European skiing competitions. Therefore, Viessmann's capability in assembling the final product and its brand recognition are complementary to Grundfos'sknow-how about making essential parts of the final product. Both partners are unlikely to compete head to head in the future. All of these factors indicate good "strategy" fit.

Questions to evaluate strategy fit

  • What are the key objectives of this alliance from the standpoint of each partner?
  • What are the key performance indicators for this alliance from the standpoint of both partners?
  • What are each partner’s long-term objectives?
  • Are the partners current competitors or are they likely to compete in the same product or geographic markets in the future?
  • How can this alliance help the partners achieve their competitive advantage?
  • How might each partner cheat the other? What would each partner gain from each form of cheating?
  • When will the partners exit the alliance? What are the exit terms?

You can evaluate strategy fit between your firm and its partners by asking the questions above. The questions about performance objectives and exit terms are vitally important. Many alliances begin when senior executives from both companies meet at an industry event, "fall in love" with each other's strategic vision, and go home to tell their organizations that from now on they have an alliance.

However, in order to help both companies clarify what they really want from the alliance as well as determine whether the other partner is serious about it, you need to determine the exit terms and key performance indicators in advance.

During the "honeymoon" period before the relationship actually begins, if you and your partner cannot agree on how you will measure success of the relationship and discuss how the relationship should be terminated, there's a high probability that the relationship was not made in heaven.

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