Managing across Boundaries:

The Collaborative Challenge

In the early 1980, the strategic challenge for a company was viewed primarily as
one of protecting its potential profits from erosion through either competition or
bargaining. Such erosion of profits could be caused not only by the actions of competitors,
but also by the bargaining powers of customers, suppliers, and governments. The key
challenge facing a company was assumed to be its ability to maintain its independence
by maintaining firm control over its activities. Furthermore, this strategic approach
emphasized the defensive value of making other entities depend on it by capturing critical
resources, building switching costs, and exploiting other vulnerabilities.
A decade later, this view of strategy underwent a sea change. The need to pursue
multiple sources of competitive advantage simultaneously led not only to the need for
building an interdependent and integrated network organization within the company, but
also to the need for building collaborative relationships externally with governments,
competitors, customers, suppliers, and a variety of other institutions.
The important shift in strategic perspective was triggered by a variety of factors
including rising R&D costs, shortening product life cycles, growing barriers to market
entry, increasing need for global-scale economies, and the expanding importance of
global standards. Such dramatic changes led managers to recognize that many of the
human, financial, and technological resources they needed to compete effectively lay
beyond their boundaries, and were often – for political or regulatory reasons – not for
sale. This led many to shift their strategic focus away from an all-encompassing
obsession with preempting competition to a broader view of building competitive
advantage through selective and often simultaneous reliance on both collaboration and
competition.
The previously dominant focus on value appropriation that characterized all
dealings across a company’s organizational boundary changed to simultaneous
consideration of both value creation and value appropriation. Instead of trying to enhance
their bargaining power over customers, companies began to build partnerships with them,
thereby bolstering the customer’s competitive position and, at the same time, leveraging
their own competitiveness and innovative capabilities. Instead of challenging or, at best,
accommodating the interests of host governments, many MNCs began actively pursuing
cooperative relationships with government agencies and administrators.
However, perhaps the most visible manifestation of this growing role of
collaborative strategies lies in the phenomenon often described as strategic alliances: the
increasing propensity of MNCs to form cooperative relationships with their global
competitors. As described by Carlo de Benedetti, the ex-chairman of Olivetti and the key
instigator of the variety of partnerships that Olivetti had developed with companies such
as AT&T and Toshiba, “We have entered the age of alliances… In the high-tech markets
of the 1990s, we will see a shaking out of the isolated and a shaking in of the allied.” It
was a prediction that was proved quite accurate, and by the turn of the century strategic
alliances had become central components of most MNC strategies.
Although our analysis of the causes and consequences of such collaborative
strategies in this chapter focuses on the phenomenon of strategic alliances among global
competitors, some of our arguments can be applied to a broader range of cooperative
relations including those with customers, suppliers, and governments. We begin with a
discussion of the key motivations for forming strategic alliances, then analyze the
considerable risks such alliance arrangements carry, before proposing ideas about how
managers might think about the key challenges and tasks involved in building and
managing such alliances. The final section provides some brief conclusions.
Why Strategic Alliances?
The term strategic alliance has become widely used to describe a variety of
different interfirm cooperation agreements ranging from shared research to formal joint
ventures and minority equity participation. But regardless of the definitional vagueness,
many recent studies have shown that large numbers of firms worldwide, including many
industry leaders, are becoming increasingly involved in strategic alliances. Furthermore,
several of these surveys have suggested that such partnerships are distinguishable from
the traditional foreign investment joint ventures in several important ways.
Classically, the traditional joint ventures were formed between a senior
multinational headquartered in an industrialized country and a junior local partner in a
less-developed or less-industrialized country. The primary goal that dominated their
formation was to gain new market access for existing products. In this classic contractual
agreement, the senior partner provided existing products while the junior partner provided
the local marketing expertise, the means to overcome any protectionist barriers, and the
governmental achieved increased sales volume, and the local firm gained access to new
products and often learned important new skills from its partner.
In contrast, the scope and motivations for the modern form of strategic alliances
are clearly broadening. There are three trends that are particularly noteworthy. First,
present-day strategic alliances are increasingly between firms in industrialized countries.
Second, the focus is frequently on the creation of new products and technologies rather
than the distribution of existing ones. And third, the present-day strategic alliances are
often forged during industry transitions when competitive positions are shifting and the
very basis for building and sustaining competitive advantage is being defined.
All of these characteristics make the new form of strategic alliances considerably
more strategically important than the classic joint ventures they succeeded, and today the
opportunity for competitive gain and loss through partnering is substantial. In the following
paragraphs, we discuss in more detail why this rapidly developing form of business
relationship is becoming so important by focusing on five key motivations that are driving
the formation of strategic alliances: technology exchange, global competition, industry
convergence, economies of scale, and alliances as an alternative to merger.
Technology Exchange
Various studies have confirmed that technology transfer or R&D collaboration is the major
objective of over half the strategic alliances formed in recent years. The reason that
technological exchange has become such a strong driver of alliances is simple: as more
and more breakthroughs and major innovations increasingly are based on
interdisciplinary and interindustry advances, the formerly clear boundaries between
different industrial sectors and technologies become blurred. As a result, the necessary
capabilities and resources are often beyond the scope of a single firm, making it
increasingly difficult to compete effectively on the strength of one’s own internal R&D
efforts. The need to collaborate is further intensified by shorter product life cycles that
increase both the time pressure and risk exposure while reducing the potential payback
of massive R&D investments.
Not surprisingly, technology-intensive sectors such as telecommunications, information
technology, electronics, pharmaceuticals, and specialty chemicals have become the
central arenas for major and extensive cooperative agreements. Companies in these
industries face an environment of accelerating change, short product life cycles, small
market windows, and multiple vertical and lateral dependencies in their value chains.
Because interfirm cooperation has often provided a solution to many of these strategic
challenges, much of the technological development in each of these industries is now
being driven by some form of R&D partnership.
Even mainstream industrial MNCs have employed strategic alliances to meet the
challenge of coordinating and deploying discrete pools of technological resources without
sacrificing R&D and commercialization scale advantages. For example, several
advanced material suppliers have teamed up with global automotive companies to
transfer their specialized technology across geographic borders. One typical example
was the key role GEC played in transferring the Ford Xenoy bumper technology from
Europe and adapting it to the U.S. market.
Global Competition
Over the past decade or so, fast-growing and widespread perception has emerged that
global competitive battles will increasingly be fought out between teams of players aligned
in strategic partnerships. Robert P. Collin, head of the U.S. subsidiary of a joint venture
between General Electric and Fanuc, the Japanese robot maker, was blunt in his
evaluation of the importance of using alliances as a key tool in competitive positioning.
“To level out the global playing field,” he said, “American companies will have to find
partners.” In the new game of global networks, successful MNCs from any country of
origin may well be those that have chosen the best set of corporate allies.
Particularly in industries where there is a dominant worldwide market leader, strategic
alliances and networks allow coalitions of smaller partners to compete more effectively
against a global “common enemy” rather than each other. For example, the Symbian
alliance among Psion, Ericsson, Nokia, and Motorola was created as a response to
Microsoft’s entry into the personal digital assistant (PDA) market. The partners
recognized that their only hope of challenging Microsoft’s new PDA operating system,
Windows CE, was by developing a common standard in mobile phone and PDA operating
systems.
Industry Convergence
Many high-technology industries are converging and overlapping in a way that seems
destined to create a huge competitive traffic jam. Producers of computers,
telecommunications, and components are merging; bio and chip technologies are
intersecting; and advanced materials applications are creating greater overlaps in diverse
applications from the aerospace to the automotive industry. Again, the preferred solution
has been to create cross-industry alliances.
Furthermore, strategic alliances are sometimes the only way to develop the complex and
interdisciplinary skills necessary in the competitive time frame required. Through such
collaboration, alliances also become a way of shaping competition by reducing
competitive intensity, by excluding potential entrants and isolating particular players, and
by building complex integrated value chains that can act as a barrier to those who chose
to go it alone.
Nowhere are the implications of this cross-industry convergence and broad-based
collaboration clearer than in the case of high-definition television (HDTV). As with many
other strategically critical technologies of the future--biotechnology, superconductivity,
advanced ceramics, artificial intelligence--HDTV not only dwarfs previous investment
requirements, but also extends beyond the technological capabilities of even the largest
and most diversified MNCs. As a result, the development of this important new industry
segment has been undertaken almost exclusively by country-based, cross-industry
alliances of large powerful companies. In Japan, companies allied together to develop the
range of products necessary for a system offering. At the same time, a European HDTV
consortium was banded together to develop a competitive system. But in the United
States, the legal and cultural barriers that prevented companies from working together in
such partnerships threatened to compromise U.S. competitiveness in this major new
industry.
Economies of Scale and Reduction of Risk There are several ways in which strategic
alliances and networks allow participating firms to reap the benefits of scale economics
or learning--advantages that are particularly interesting to smaller companies trying to
match the economic benefits that accrue to the largest MNCs. First, partners can pool
their resources and concentrate their activities to raise the scale of activity or the rate of
learning within the alliance significantly over that of each firm operating separately.
Second, alliances allow partners to share and leverage the specific strengths and
capabilities of each of the other participating firms. Third, trading different or
complementary resources between companies can also result in mutual gains and save
each partner the high cost of duplication.
Beyond the scale benefits, companies are also motivated by the risk-sharing
opportunities. These two companies came together in 1999, with Renault taking a 36%
in Nissan and installing Carlos Ghosn as its chief operating officer. Although Nissan’s
perilous financial position was evidently a key factor in their decision to bring in a foreign
partner, the underlying driver of the alliance was the need--on both sides--for greater
economies of scale and scope to achieve competitive parity with GM, Ford, and Toyota.
The alliance led to a surprisingly fast turnaround of Nissan’s fortunes, largely through
Ghosn’s decisive leadership, and subsequently to a broad set of projects to deliver
synergies in product development, manufacturing, and distribution. Although still much
smaller than GM or Ford, Renault-Nissan is now thought likely to be one of the long-term
surviving players in the global automobile industry.
Alliance as an Alternative to Merger
Finally, there are still many industry sectors where political, regulatory, and legal
constraints limit the extent of cross-border mergers and acquisitions. In such cases,
companies often create alliances, not because they are inherently the most attractive
organizational form but because they represent the best available alternative to merger.
The classic example of this phenomenon is the airline industry. Most countries still
preclude foreign ownership of their domestic airlines. But a simple analysis of the
economics of the industry--in terms of potential economies of scale, concentration of
suppliers, opportunities for standardization of services, and competitive dynamics--would
point to the availability of substantial benefits from global integration. So as a means of
generating at least some of the benefits of global integration, while not breaking the rules
against foreign ownership, airlines have formed themselves into marketing and code-
sharing partnerships including Star Alliance and OneWorld.
Alliances of this type often lead to full-scale global integration if restrictions on foreign
ownership are lifted. For example, as the telecommunications industry was gradually
deregulated during the 1990s, alliances such as Concert and Unisource gave way to the
emergence of true multinational players such as Worldcom, France Telecom, and
Deutsche Telekom.
THE RISKS AND COSTS OF COLLABORATION
Because of these different motivations, there was an initial period of euphoria in which
partnerships were seen as the panacea for most of the MNCs’ global strategic problems
and opportunities. Particularly in the 1980s, a large number of companies rushed to form
polygamous relationships with a variety of partners around the world. The euphoria was
fueled by two fashionable management concepts of the period: triad power and stick to
your knitting.
The triad power concept emphasized the need to develop significant positions in the three
key markets of the United States, western Europe, and Japan as a prerequisite for
competing in global industries. Given the enormous costs and difficulties of independently
accessing any one of these developed and highly competitive markets, many companies
with unequal legs to their geographic stool saw alliances as the only feasible way to
develop this triadic position.
The stick-to-your-knitting prescription in essence urged managers to disaggregate the
value chain and focus their investments, efforts, and attention on only those tasks in which
the company had a significant competitive advantage. Other operations were to be
externalized through outsourcing or alliances. The seductive logic of both arguments,
coupled with the rapidly evolving environmental demands, led to an explosion in the
formation of such alliances during the 1980s. According to one study, the number of
cooperative agreements between companies in different regions (U.S.-Japan, EU-Japan,
U.S.-EU) rose from close to zero in 1979 to more than 360 in 1985.
Since then, the experience companies gathered through such collaborative ventures
highlighted some of the costs and risks of such partnerships. Some risks arise from the
simultaneous presence of both collaborative and competitive aspects in such
relationships. Others arise from the higher levels of strategic and organizational
complexity of managing cooperative relationships outside the company’s own
boundaries.
The Risks of Competitive Collaboration
Many strategic alliances--including some of the most visible--involve partners who are
fierce competitors outside the specific scope of the cooperative venture. Such
relationships create the possibility that the collaborative venture might be used by one or
both partners to develop a competitive edge over the other, or at least that the benefits
from the partnership would be asymmetrical to the two parties, thereby changing their
relative competitive positions. There are several factors that might cause such
asymmetry.
A partnership is often motivated by the desire to join and leverage complementary skills
and resources. For example, the two partners may have access to different technologies
that can be combined to create new businesses or products. For example SonyEricsson
was created to bring together Sony’s world-leading technological know-how in mobile
phones and strong relationships with mobile operators. Such an arrangement for
competency pooling inevitably entails the possibility that, in the course of the partnership,
one of the partners will learn and internalize the other’s skills while carefully protecting its
own, thereby creating the option of ultimately discarding the partner and appropriating all
the benefits created by the partnership. This possibility becomes particularly salient when
the skills and competencies of one of the partners are tacit and deeply embedded in
complex organizational processes (and thereby difficult to learn or emulate), whereas
those of the other partner are explicit and embodied in specific individual machines or
drawings (and thereby liable to relatively easy observation and emulation).
When General Foods entered into a partnership with Ajinimoto, the Japanese giant, it
agreed to make available its advanced processing technology for products such as
freeze-dried coffee. In return, its Japanese partner would contribute its marketing
expertise to launch the new products on the Japanese market. After several years,
however, the collaboration deteriorated and was eventually dissolved when Ajinomoto
had absorbed the technology transfer and management felt it was no longer learning from
its American partner. Unfortunately, General Foods had not done such a good job
learning about the Japanese market and left the alliance with some bitterness.
The other predatory tactic might involve capturing investment initiative in order to use the
partnership to erode the other’s competitive position. In this scenario, the company
ensures that it, rather than the partner, makes and keeps control over the critical
investments. Such investments can be in the domain of product development,
manufacturing, marketing, or whatever the most strategically vital part of the business
value chain is located. Through these tactics, the aggressive company can strip its partner
of the necessary infrastructure for competing independently and create one-way
dependence on the collaboration that can be exploited at will.
Although they provide lively copy for magazine articles, such Machiavellian intentions and
actions remain the exception, and the vast majority of cross-company collaborations are
founded on a basis of mutual trust and shared commitment. Yet experience has shown
that even the most carefully constructed strategic alliances can become highly risky and
problematic ventures. Although many provide short-term solutions to some strategic
problems, they can also serve to hide the deeper and more fundamental deficiencies that
cause those problems. The short-term solution takes the pressure off the problem without
solving it and makes the company highly vulnerable when the problem finally resurfaces,
now in a more extreme and immediate form.
Furthermore, because such alliances typically involve sharing of tasks, each company
almost inevitably loses some of the benefits from “learning by doing” for the tasks that it
externalizes to its partner. Finally, even in the best-case scenario of a partnership that
fully meets all expectations, the very success of partnership leads to some benefits for
each partner and, therefore, to some strengthening of one’s competitor. Behind the
success of the alliance, therefore, lies the ever-present possibility that a competitor’s
newly acquired strength will be used against its alliance partner in some future
competitive battle.
The Cost of Strategic and Organization Complexity
Cooperation is difficult to attain even in the best of circumstances. One of the strongest
forces facilitating such behavior within a single company’s internal operations is the
understanding that the risks and rewards ultimately accrue to the company’s own
accounts, and therefore, either directly or indirectly, to the participants. This basic
motivation is greatly diluted in strategic alliances. Furthermore, the scope of most
alliances and the environmental uncertainties they inevitably face often prevent clear
understanding of the risks that might be incurred or rewards that might accrue in the
course of the partnership’s evolution. As a result, cooperation in the context of allocated
risks and rewards and divided loyalties inevitably creates additional strategic and
organizational complexity, in turn, involves additional costs for managing those
complexities.
International partnerships bring together companies that are often products of vastly
different economic, political, social, and cultural systems. Such differences in the
administrative heritages of the partner companies, each of which brings its own strategic
mentality and managerial practices to the venture, further exacerbate the organizational
challenge. For example, tensions between Xerox and Fuji Xerox--a successful but often
troubled partnership documented in Case 6-1--were as much an outgrowth of the
differences in the business systems in which each was located as differences in the
corporate culture between the U.S. company and its Japanese joint venture.
Biases and set perspectives even affect whole economies. Protected against takeover
possibilities by a variety of legal and institutional factors, many Dutch, Swiss, or Japanese
companies are continually bewildered by what they have perceived as the “accounting
mentality” of their British or U.S. partners. Subject to the expectations of “The City” or
“The Street” and forever under the threat of a hostile bid, the British and U.S. partners
have been equally puzzled by their Swiss or Japanese partners’ insensitivity to stock price
effects of announces and actions. Many alliances have been undone by what one side
perceives as its partners’ naivete in financial and planning matters, and the other party
views as short-term accounting games.
Organizational complexity that is due to the very broad scope of operations typical of
many strategic alliances also contributes to the added difficulties. As we described in the
introduction to this chapter, one of the distinguishing characteristics of present-day
alliances is that compared to the narrower and more focused goals of earlier joint
ventures, they often cover a broad range of activities. This expansion of scope requires
partners not only to manage the many areas of contact within the alliance, but also to
coordinate the different alliance-related tasks within its own organization. And the goals,
tasks, and management processes for the alliance must be constantly monitored and
adapted to changing conditions.
BUILDING AND MANAGING COLLABORATIVE VENTURES
As we have described in the preceding sections, alliances are neither conventional
organizations with fully internalized activities, nor are they well-specified transaction
relationships through which externalized activities are linked by market-based contracts.
Instead, they combine elements of both. The participating companies retain their own
competitive strategies and performance expectations as well as their national ideological
and administrative identities. Yet, to obtain the required benefits out of the partnership,
diverse organizational units in different companies and in different countries must
effectively and flexibly coordinate their activities.
There are numerous reasons why such collaborative ventures inevitably present some
very significant management challenges: strategic and environmental disparities among
the partners, lack of a common experience and perception base, difficulties in interfirm
communication, conflicts of interest and priorities, and inevitable personal differences
among individuals who manage the interface. As a result, although it is manifest to the
most managers that strategic alliances can provide great benefits, they have also begun
to realize that there is a big difference between making alliances and making them work.
The challenge can be considered in two parts, reflecting the prealliance tasks of
analysis, negotiation, and decision making and the postalliance tasks of coordination,
integration, and adaption.
Building Cooperative Ventures
Alliances are like marriages. Just as the foundations of the relationship established during
the dating process influences the quality and durability of the marriage, so the quality of
the prealliance processes of partner selection and negotiation influence the clarity and
reciprocity of mutual expectations from the alliance. There are three aspects of the
prealliance process to which managers must pay close attention if the alliance is to have
the best possible chance of success: partner selection, escalating commitment, and
alliance scope.
Partner Selection: Strategic and Organizational Analysis The process of analyzing a
potential partner’s strategic and organizational capabilities is perhaps the most important
yet also the most difficult of the prealliance tasks. Several factors impede the quality of
the choice-making process.
The most important constraint lies in the availability of information required for an
effective evaluation of the potential partner. Effective prealliance analysis needs data on
the partner’s relevant physical assets (such as the condition and productivity of plant and
equipment), as well as on less-tangible assets (including the strength of brands, the
quality of customer relationships, and the level of technological expertise) and
organizational capabilities (such as managerial competence, employee loyalty, and
shared values). The difficulty of obtaining such information in the short time liits in which
most alliances are finalized is further complicated by the barriers of cultural and physical
distance that MNCs must also overcome.
One key lesson emerging from the experience of most strategic alliances is that
changes in each partner’s competitive positions and strategic priorities have crucial
impacts on the viability of the alliance over time. Even if the strategic trajectories of two
companies cross at a particular pint of time creating complementarities and the potential
for a partnership, their paths may be so divergent as to make such complementarities too
transient for the alliance to have any lasting value.
Although it is difficult enough to make a static assessment of a potential partner’s
strategic and organizational capabilities, it is almost impossible to make an effective
prealliance analysis of how those capabilities are likely to evolve over time. Fuji Xerox
again provides an interesting example. When the joint venture was formed, Xerox was
clearly the senior partner from a technological point of view, so processes were created
to facilitate knowledge transfer to Fuji Xerox, such as allowing Fuji Xerox scientists
(“residents”) to visit Xerox’s Rochester and Palo Alto laboratories for extended periods.
Xerox, on the other hand, did not see any value in being able to send its scientists over
to Japan during the first two decades of partnership, so no such transfers were negotiated
Today, the fortunes of the two companies have changed, and it is arguably Fuji Xerox
that has the technological edge. But the “resident” program for Fuji Xerox scientists to
visit Xerox (and not vice versa) still exists.
Although there is probably no solution to this problem, companies that recognize
alliances as a permanent and important part of their future organization have made
monitoring for partners an ongoing rather than ad hoc process. Some have linked such
activities into their integrated business intelligence system set up to monitor competitors.
By having this group not only to analyze their competitors’ potential strategies but also to
assess their value as acquisition or alliance candidates, these companies find themselves
much better prepared when a specific alliance opportunity arises.
Escalating Commitment: Thrill of the Chase The very process of alliance planning and
negotiations can cause unrealistic expectations and wrong choices. In particular, some
of the managers involved in the process can build up a great deal of personal enthusiasm
and expectations in trying to sell the idea of the alliance within their own organization.
This escalation process is similar to a process observed in many acquisition decisions
where, in one manager’s words, “The thrill of the chase blinds pursuers to the
consequences of the catch.” Because the champions of the idea – those most often
caught in a spiral of escalating commitment – may be different from the operational
managers who are later given responsibility for making the alliance work, major problems
arise when the latter are confronted with inevitable pitfalls and less-visible problems.
The most effective way to control this escalation process is to ensure that at least
the key operating managers likely to be involved in the implementation stage of the
alliance are involved in the predecision negotiation process. Their involvement not only
ensures greater commitment, but also creates a continuity between the pre- and
postalliance actions. But the greatest benefit accrues to the long-term understanding that
must develop between the partners. By ensuring that the broader strategic goals that
motivate the alliance are related to specific operational details in the negotiation stage,
the companies can enhance the clarity and the consistency of both the definition and the
understanding of the alliance’s goals and tasks.
Alliance Scope: Striving for Simplicity and Flexibility All too often, in an effort to show
commitment at the time of the agreement, partners press for broad and all encompassing
corporate partnership and equity participation or exchange. Available experience, on the
other hand, suggests that the key to successful alliance building lies in defining as simple
and focused a scope for the partnership as is adequate to get the job done, and to retain
at the same time the possibility to redefine and broaden the scope if needed. This is
because alliances that are more complex also require more management attention to
succeed and tend to be more difficult to manage.
Three factors add to the management complexity of a partnership: complicated
cross-holdings of ownership or equity, the need for cross-functional coordination or
integration, and breadth in the number and scope of joint activities. Before involving any
alliance in such potentially complicated arrangements, management should ask the
question: “Are these conditions absolutely necessary, given our objectives?” If a simple
OEM (original equipment manufacturer) arrangement can suffice, it is not only
unnecessary to enter into a more committed alliance relationship but it is also undesirable
because the added complexity will increase the likelihood of problems and difficulties in
achieving the objectives of the partnership.
At the same time, it might be useful to provide some flexibility in the terms of the
alliance for renegotiating and changing the scope, if and when found necessary. Even
when a broad-based and multifaceted alliance is seen as the ultimate goal, many
companies have found that it is preferable to start with a relatively simple and limited
partnership whose scope is expanded gradually as both partners develop both better
understanding of and greater trust in each other’s motives, capabilities, and expectations.
Managing Cooperative Ventures
In personal relationships, whereas the mutual understanding and shared expectations
developed during the courtship period affect the quality of the relationship after marriage,
it is the ongoing commitment and flexibility of each partner that hast the greater influence
on determining the durability and success of such a union. Similarly, in corporate
relationships, although the prealliance analysis and negotiation processes are important,
it is a company’s ability to manage the ongoing relationship that tends to be the key
determining factor for the success or failure on alliance. Among the numerous issues that
influence a company’s ability to manage a cooperative venture, there are three that
appear to present the greatest challenges: managing the boundaries, managing
knowledge flows, and providing strategic direction.
Managing the Boundary: Structuring the Interface There are many different ways in
which the partners can structure the boundary of the alliance and manage the interface
between this boundary and their own organizations. At one extreme, an independent legal
organization can be created and given complete freedom to manage the alliance tasks.
Alternatively, the alliance’s operations can be managed by one or both parents with more
substantial strategic, operational, or administrative controls. In many cases, however, the
creation of such a distinct entity is not necessary, and simpler, less bureaucratic
governance mechanisms such as joint committees may often be enough to guide and
supervise shared tasks.
The choice among alternative boundary structures depends largely on the scope
of the alliance. When the alliance’s tasks are characterized by extensive functional
interdependencies, there is a need for a high level of integration in the decision-making
process relating to those shared tasks. In such circumstances, the creation of a separate
entity is often the only effective way to manage such dense interlinkages. On the other
hand, an alliance between two companies with the objective of marketing each other’s
existing products in noncompetitive markets may only need a few simple rules
determining marketing parameters and financial arrangements, and a single joint
committee to periodically review the outcomes.
Managing Knowledge Flows: Integrating the Interface Irrespective of the specific
objectives of any alliance, the very process of collaboration creates flows of information
across the boundaries of the participating companies and creates the potential for
learning from one another. Managing these knowledge flows involves two kinds of tasks
for the participating companies. Frist, they must ensure full exploitation of the learning
potential so created. Second, they must also prevent outflow of any information or
knowledge they do not wish to share with their alliance partners.
In terms of the first point, the key problem is that the individuals managing the
interface may often not be the best users for such knowledge. To maximize its learning
from the partnership, a company must effectively integrate its interface managers into the
rest of its organization. The gatekeepers must have knowledge of and access to the
different individuals and management groups within the company who are likely to benefit
most from the diverse kinds of information that flow through an alliance boundary.
Managers familiar with the difficulties in managing information flows within the company’s
boundaries will readily realize that such cross-boundary learning is unlikely to occur
unless specific mechanisms are created to make it happen.
The well-known NUMMI partnership between GM and Toyota illustrates this
challenge. Located in Fremont, California, NUMMI quickly became one of the highest
productivity auto plants in North America. Yet despite the active involvement of hundreds
of GM Mangers in running the plant, and GM’s stated intention of learning from Toyota,
the American partner never created an effective mechanism for transferring the
knowledge gained in NUMMI to other GM plants.
Selection of appropriate interface managers is perhaps the single most important
factor for facilitating such learning. Interface managers should have at least three key
attributes: They must be well versed in the company’s internal organizational process;
they must have the personal creditability and status necessary to access key managers
in different parts of the organization; and they must have sufficiently broad understanding
of the company’s business and strategies to be able to recognize useful information and
knowledge that might cross their path.
Merely placing the right managers at the interface is not sufficient to ensure
effective learning, however. Supportive administrative processes must also be developed
to facilitate systematic transfer of information and to monitor the effectiveness of such
transfers. Such support is often achieved most effectively through simple systems and
mechanisms such as task forces or periodic review meetings.
 While exploiting the alliance’s learning potential, however, each company must
also manage the interface to prevent unintended flows of information to its partner. It is a
delicate balancing task for those playing the gatekeeper role to ensure the free flow of
information across the organizational boundaries while effectively regulating the flow of
people and data to ensure that sensitive or proprietary knowledge is appropriately
protected.
Providing Strategic Direction: The Governance Structure The key to providing
leadership and direction, ensuring strategic control, and resolving interorganizational
conflicts is an effective governance structure. Unlike acquisitions, alliances are often
premised on the equality of both partners, but an obsession to protect such equality often
prevents companies from creating an effective governance structure fort he partnership.
Committees consisting of an equal number of participants from both companies and
operating under strict norms of equality are often incapable of providing clear directions
or forcing conflict resolution at lower levels. Indeed, many otherwise well-conceived
alliances have floundered because of their dependence on such committees for their
leadership and control.
To find their way around such problems, partners need to negotiate on the basis
of what is termed “integrative” rather than “distributive” equality. Under such agreement,
each committee would be structured with clear single-handed leadership, but with each
company taking the lead responsibility for different tasks. However, such delicately
balanced arrangements can work only if the partners can agree on specific individuals,
delegate the overall responsibility for the alliance to these individuals, and protect their
ability to work to the best interests of the alliance itself rather than those of the parents.
Concluding Comments
Perspectives on strategic alliance have oscillated between the extremes of euphoria and
disillusionment. Finally, however, there seems to be recognition that although such
partnerships may not represent perfect solutions, they are often the best solution
available to a particular company, at a particular point in time.
Easy – but Often Not the Best Solution
Perhaps the biggest danger for many companies is to pretend that the “quick and easy”
option of a strategic alliance is also the best or the only option that is available.
Cooperative arrangements are perhaps too tempting in catch-up situations where the
partnership might provide a facade of recovery that masks serious problems.
Yet, while going it alone may well be the best option for any specific objective or
task in the long term, almost no company can afford to meet all of its objectives in this
way When complete independence and self-sufficiency are not possible because of
resource scarcity, lack of expertise, or time, or any other such reason, strategic alliances
often become the second-best option.
Alliances Need Not Be Permanent
Another important factor that is commonly misunderstood is that dissolution of a
partnership is no synonymous with failure. Many companies appear to have suffered
because of their unwillingness or inability to terminate partnership arrangements when
changing circumstances made those arrangements inappropriate. All organizations
create internal pressures for their own perpetuation, and an alliance is no exception to
this enduring reality. One important task for senior managers of the participating
companies is to periodically ask the question why the alliance should not be terminated
and to continue with the arrangement only if they can find compelling reasons to continue.
Flexibility Is Key
The original agreement for a partnership is typically based on limited information and
unrealistic expectations. Experience from the actual process of working together provides
the opportunity for fine-tuning and often for finding better ways of achieving higher levels
of joint value creation. In such circumstances, the flexibility to adapt the goals, scope, and
management of the alliance to changing conditions is essential. Besides, changing
environmental conditions often make obsolete the original intentions and plans. Effective
partnering requires the ability to monitor these changes and allow the partnership to
evolve in response.
An Internal Knowledge Network: Basis for Learning
Finally, learning is one of the main benefits that a company can derive from a partnership,
irrespective of whether it is one of the formal goals. For such learning to occur, however,
a company must be receptive to the knowledge and skills available fro the partner and
must have an organization able to diffuse and leverage such learning. In the absence of
an internal knowledge network, information obtained from the partner cannot be
transferred and applied irrespective of potential value. Thus, building and managing an
integrated network organization is an essential prerequisite not only for effective internal
processes, but also for effective management across organizational boundaries.
Star Alliance
The airline network for Earth.
Pages 636-645

But Air Canada summarized Star Alliance to be a “very close-knit and fun group.”
According to the Canadians, Lufthansa was like a cheerleader within Star Alliance but
they didn’t impose their ways, “as much as one would expect because of their culture and
size.” Referring to the normal battle for power among the heavyweights, Charbonneau
recalled that “United and Lufthansa were the biggest airlines in the Alliance, but there was
no clash between them, unlike BA and AA in oneworld.”
“My biggest joy was how smooth and how little cross-cultural issues we
encountered in Star,” said Lufthansa’s Sattleberger. “Relations were not stereotyped,
which was a good thing.”
Air Canada described the culture that existed within Star Alliances to have “mutual
respect and great bonding, which went beyond work.” When Air Canada faced a hostile
take over by Onex Corporation in 1999, it received immediate and unsolicited support
from Lufthansa to launch a counter attack, “Lufthansa asked us, so what do WE do next?”
recalled Charbonneau.
Culture and corporate size were not the only things that differed within Star.
Different airlines had different business philosophies too. “Projects that cost a few
hundred thousand could be signed off easily by bigger carriers without doing cost-benefit
analysis, but we had to do our analysis. This difference in philosophies caused some
frustration at times,” recalled Jansen.
In matters of brand-building, United saw that “everyone agreed that Star Alliance
was important to promote, but there was a spectrum of how people saw their brands
promoted, from being loosely connected where the individual brands got more
prominence, to being virtually merged, where the individual brands come second to the
Star Alliance brand.”
United used the analogy of the European Union in explaining the cultural dynaic
that was going on. “Some airlines felt the same way as Great Britain, which wants to
remain ‘British’ because it values its identity. On the other hand, other airlines are
behaving more like Belgium, which is happy to be called ‘European ‘first and foremost.”
United further explained that the strength of the individual brands within the
Alliance was different. “United has higher brand recognition compared to Mexicana. It is
thus very important for us to retain our brand in different parts of the world. We don’t want
to forfeit our identity for the sake of Star Alliance. Our airlines have recognition; Star
Alliance has too. Mexicana derives a halo effect from Star Alliance. United in Hong Kong
also leverages the Star Alliance brand, so a reciprocal benefit exists.”
 That described Star’s culture aptly. “It’s all about being sensitive to one another.
You had to take off your own hat and put on the Star Alliance hat,” shared Phenjati. He
summarized: “The key thing for each partner is to have the willingness to adapt and
absorb the differences in culture and thinking to the whole system.”

Coping with Crises – The biggest test in Star Alliance’s cultural cohesion came after 11
September 2001, when the whole airline industry experienced the effects of the hijackings
in the United States Albrecht called all his CEOs to Frankfurt soon after the attacks. “You
are all facing unprecedented challenges. How can we help each other out? What can we
do as a group to leverage our power?”
“A taskforce was set up composed of cost specialists who identified areas where
we could cut costs, which involved anything except labor,” he explained. “Examples of
initiatives included consolidation of projects, joint purchasing, and avoiding the duplication
of processes at airports and call centers. The goal was to identify quick hits and then lay
the groundwork for longer-term cost savings.”
United, which was directly affected by the attacks, saw the Alliance network in
action. “We really pulled together,” recalled Schoff. “After September 11, there were
hundreds of passengers stranded all over the world that we had to look after. We had to
get our passengers home.”