Considerations for a Strategic Alliance - O'Keeffe and O'Malley

Considerations for a Strategic Alliance

Oct 03, 2014

Entering into a strategic alliance can be one of the most critical negotiations in the life of a company, and requires as much management attention as any other critical capital investment decision.

Strategic alliances can offer the proverbial (and elusive) “win/win” possibility by careful matching of the partners’ objectives. With adequate preparation, the objectives will more likely be met, risks will be reduced, and the strategic alliance can be successful.

The decision to investigate the possibility of entering into a strategic alliance may come at any time in the corporate life cycle, but typically comes when a new product or market thrust is being considered. It could come early in a company’s life when the first product is being developed for market, or it could come when a mature company has adopted a strategy of entering into a new marketplace. In any case, the motivation will come as management examines the need for resources to implement the strategy they have chosen. We have found that corporate management most often focuses on the need for cash, and usually will look to an outside financial investor or a financial lender such as a bank. The Growth Resources Model below can be used to draw management’s attention to other sources and types of resources.

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It serves as a framework for making strategic financial decisions. The “inner world” of a company - customers, suppliers, competitors and current partners- not only already know the company, but can offer many types of resources beyond cash. The “outer world” of primarily financial investors may not know the company yet, but can provide cash and other valuable resources. We will focus on potential agreements with the “inner world” as well as potential strategic corporate investors from the “outside world.”

Objectives of a Strategic Alliance

Strategic alliances provide flexibility in trading off time, capital and control in return for needed resources. There may be many objectives, but they cannot all be obtained simultaneously, or without giving up something in return. The first set of alliance objectives revolves around obtaining the resources and skills needed to implement a corporate strategy. Typical categories are:

Technology, Distribution Channels, Sales Force, Access to customers and markets, Market reputation, Regulatory expertise, Manufacturing Capabilities, Business skills, Capital.

For some companies, a strategic alliance may speed the path to the marketplace or to spread the technical and financial risk of an undertaking. Quite often, a smaller company will be motivated to seek a strategic alliance in order to enhance their credibility in the industry by associating with a more established and respected company.


As might be expected, the case for strategic alliances is not one-sided. There are risks involved, but careful preparation can reduce them. The most obvious risk is that of losing control of your company’s destiny. For any partner, large or small, there is a danger that another party to the agreement cannot carry out their assigned portion of the responsibilities. This concern can never be totally eliminated, but in-depth due diligence will reduce the risk. A small company may also feel a loss of independence, which depends greatly on the management and objectives of the larger partner. If a company is approached by another company to participate as a partner in a cooperative activity, the potential partner should insure that it will not defocus its own activities by its participation.

No company enters into an agreement without expecting to gain from it. The total return from a well-engineered alliance will be greater than the sum of what the members could have achieved without the alliance, but this may be at the cost of some potential gains for one of the partners. Another risk, which can only be addressed by thorough knowledge of your core competencies and corporate strategy, is that you may depend on a partner for skills which you need to develop to implement your long-term strategy. This could make you a hostage to your partner.

As always, corporate management must make the final determination as to whether the reward is worth the risks incurred. This is just another reason to maintain senior management involvement in any strategic venture, including the planning, as opposed to the common tendency to hand off responsibility for the alliance to middle management.

Without detailed preparation, it is notpossible to know what skills and capabilities are needed to meet company objectives. This can lead to giving up too much for a partner’s contributions, which may not be essential. Even with a good definition of what is needed, without preparation it is easy to waste time approaching partners who don’t have what is needed. Some companies also have personalities (or cultures) which will never mesh in a team effort, and others will not be compatible with specific companies. Time spent in preparation can help identify these incompatible potential partners before wasting time with them, or worse yet, negotiating a deal with them. On a positive note, careful preparation, identifying skills and operational compatibility, will help negotiate an agreement which can be successfully managed after the deal.

There are essentially three major categories of risk to consider; Performance Risk, Financial Risk, and Market Risk. Understanding these will help determine the risk of various tradeoff scenarios which will be analyzed during the alliance process.

Performance Riskmeans the risks involved in producing the product and getting it to the marketplace. Examine the process in detail, and note where the major uncertainties lie. Also consider how much control you feel you need to maintain over these steps in the process.

Another major risk is obviously the Financial Risk. Consider not only if you have the resources to initiate the project, but if you have the funding to successfully implement the project. This should include funding to buy (sub-contract) services needed.

The third major risk, which is often overlooked, is the Market Risk. This risk includes the time factor - can you get your proposed product to the market in time to satisfy the customers and beat your competition? 

You also need to examine whether you have adequate knowledge of the market to design a successful marketing campaign, and if you have the right sales force to execute your marketing and sales strategy.

What is negotiable and what is not?

At this point, it is time to sit down and ask three basic questions, followed by some in-depth tradeoff studies. The questions are:

1.      What must be retained internally for strategic purposes?

2.      What cannot be done internally?

3.      What could be done externally?

For each of these questions, examine the costs and time required. When this is done, a company will be at the point of doing tradeoffs for those tasks and activities which could be done outside your company. The primary variables in these tradeoffs will be time to complete the project (such as a new product introduction), the amount of control retained over the project, and, of course, the capital needed.

Profiling an Ideal Partner

Few companies ever find the perfect partner, but it is still important to spend some time determining the profile of that ideal. This leads naturally to a set of criteria which will help evaluate candidate companies, and which will serve as a guide in seeking information during the due diligence process. Although there are many ways to describe this ideal partner, we have found that the following areas are nearly always on the list for any deal:

· Industry and Markets

Does the partner have the knowledge of the market needed to accomplish the tasks you expect? If you don’t know the market, and are expecting the partner to lead marketing, they should have extensive, specific market experience. If they are to be visible to your customers, the partner should be known and respected in the marketplace.

· Products

Your partner needs the technology to carry out their role. They may be providing technology which you must integrate into the product, or they may need to integrate your technology in their processes. Even if they will be primarily marketing and selling products, they need to be comfortable with the technology being used.

· Culture

Any alliance will eventually be implemented between individuals within companies. This means that there are at least two cultures which must be identified and consciously considered during the alliance process. Company representatives should continually be observing the decision making process and management structure of any partner. The partner should be able to make decisions quickly, but needs to use processes which are compatible with your own. There should be some basic commonality of management and business philosophies. There will be a chemistry between partners at the individual and corporate level which can only be developed over time; however, it is useful to determine at an early stage what kind of company culture is likely to fit with yours.

· Financial Position

One of the most common reasons for strategic alliances is to obtain capital from a partner. If a capital contribution will be essential to an alliance, the financial strength of any partner is vital. If the need is for cash, then the partner's cash position will be important.

Selecting Candidate Partners

Many companies overlook the fact that they already have an “inner world” of contacts, as already discussed, which will often contain candidates for an alliance. It is important not to restrict the process at this time, and companies should “cast a wide net” in considering candidate partners. Trade associations, and those associated with a desired marketplace, can be a rich source of candidate companies. It can be difficult to be objective in considering a competitor as a potential teammate, or in considering a customer as an investor in the company. Input from outside advisors, or a Board of Directors can be very useful in gathering and evaluating potential partners.

Initial pre-negotiation contacts with potential partners should be two-way streets, no matter the relative sizes or apparent leverage positions in the deal. Insist on continuing due diligence investigations, seeking additional information from the other company, and cooperating with them in providing information. This will be the first experience of the companies in working together, and can give insight into how they may function in a cooperative environment. Use this time to validate the assumptions made in earlier assessment of the potential partner. It is also the time to find any skeletons in the closet - better now than after all parties have spent significant time in negotiations or even have a signed deal.

Entering Negotiations

One of the last bits of preparation for negotiations is also one of the most important. Companies should determine, before starting negotiations, when they will “push back” from the table.

Part of this preparation involves having a solid grasp of the value of the alliance, as measured by assessing the company’s value, both now and after the proposed deal. Business owners should never feel pressured to commit to an alliance if the analysis does not support the deal. Additional reasons for walking away include any misrepresentation by the other company, a lack of chemistry between counterparts from the companies, and any evidence of a poor operational fit. Although the logic may seem reversed, there is a much better chance of negotiating and implementing a successful strategic alliance if the parties enter negotiations with a firm picture of what they will not accept.


Alliances are potentially a life-giving or sustaining strategy for a company that does not internally possess all the skills needed to successfully reach corporate objectives. Companies need a team which is as good as they are in their core skill areas.

If they are willing to trade off capital, control and time, they can often create an alliance which reduces risk and increases the return on invested resources. It is essential for a company to build a firm foundation by understanding their own objectives and expectations from an alliance. They need to have a clear view of their options, and to take the time to determine alternate paths to create those options. Potential partners should be evaluated in terms of how they can satisfy the needs of the alliance and how the proposed alliance fits into their strategy. Continue to gather information on the potential partner through the process and be prepared to shut off negotiations if the deal being proposed does not meet the needs of the business opportunity.

O’Keeffe & O’Malley can provide assistance at any stage, from planning to implementation. Please contact us at 913.648.0185