Alliances and risk: securing a place in the victory parade

Alliances and risk:
securing a place in the victory parade
FINANCIAL TIMES
Mastering Risk, pp. 6-7
May 9, 2000
Summary
help them hedge risks, mitigate the costs Large companies once embraced joint of responding to unpredictable trends and, ventures to share the risk of large projects, but their motives today are more diverse. Benjamin Gomes-Casseres suggests
that alliances can help companies hedge between competing technology standards and reduce the costs of major strategic manage the business risks they face, they change by bringing new skills to a participating company. An alliance might that is itself notoriously risky - many joint be regarded as an option on future ventures and other alliances end in nasty developments - a company either takes it up or discards it according to changing conditions. Some alliances indeed enable business risks to be managed directly. business risk only by taking on additional Despite these attractions, relationships "relationship" risks. The tragedy for many between companies in a joint venture are often risky in and of themselves. The author closes with some advice for ensuring that the company's allies do not managing alliances are fairly well known, business risk are not. Here we will focus Thirty years ago, if you asked the chief financial officers of large companies why they used joint ventures, they would likely say: "To share risk". In fact, the modern Uncertainty and alliances
joint venture format was all but invented by oil companies to do just that. Exploring for oil was a risky endeavour and a series of dry holes could be costly - better to share these costs with a partner, even if this also meant sharing the rewards of a successful given strategic move, such as investment enterprise is likely to offer a more complex answer to the same question. Risk-sharing committing to a definite strategy until the future is clearer. Yet a third policy is to try alliances, but it may not be as important as resources, influencing industry standards or beating rivals in the rush to market. What they may not realise is that in these Alliances can help in all these approaches begin by defining "alliance". An alliance is a unique organisational structure to enable Today's alliances not only help companies share the costs of risky projects, they also Prime among them is that the project was leading edge of technology and aiming to brought huge risks for Iridium. Motorola, acquisitions. The beauty - as well as the manufacturer, and its partners did well to challenge - of an alliance lies precisely in lower their exposure to the possibility of its flexibility and the partial commitments remaining satellite-communication projects underway are led by consortia of players As a rule, alliances enable companies to seeking to share risk. Even Microsoft's Bill unfolding strategy, a useful feature when to share in the next-generation Teledesic addition, the partial commitments involved resources to invest in more than one such diversifying the risk. At the same time, uncertainty, the project itself is large and "lumpy" - a company cannot decide just to launch one satellite in an effort to lower its carefully, it can unravel and nullify all the exposure. Similar conditions exist in bio- to compel them to act co-operatively, the gridlock. The two sides of this coin are Hedge your bets
Another useful feature of alliances in bio- Managing strategic risks
they allow companies to hedge their bets Lower exposure to risk
technologies. This is also a chief reason Involving many partners in a risky venture reduces the exposure that each has to the proliferated so rapidly. In this strategy, not possibility of failure. This technique is as only is the company's exposure to failure old as capitalism - the English East India finance risky voyages. In the 20th century Bill Gates uses this strategy too. Microsoft has been investing in a slew of companies continents or drilling the earth - they are colonising the sky or probing the depths of this will occur. So, Microsoft has invested in AT&T to spur the rollout of high-speed consortium of electronics, aerospace and internet access over telephone lines, in wireless internet access and in Comcast to initiated the first round-the-world telephone promote access over cable-systems. It is service in late 1998. The enterprise cost likely that one or more of these options will pan out and that others will not. Either way winning bet. It may then use this to raise acquisition can well kill the spirit that promised to renew the acquiring company. Alliances are most useful in hedging your A case in point involves AT&T, the US world in which there are likely to be one or only a few winners. In these "winner-takes- would merge. However, in a scenario akin all" markets, it pays suppliers, customers technologies to ally with several parties to how this would happen. Even faced by this big uncertainty, AT&T charged ahead to Reduce your transition costs
$7.5bn in 1991. As it turned out, there was little synergy between the two and AT&T spun off its acquisition in 1996, after the role after forming its alliances. As events latter racked up more than $3bn in losses. An initial alliance to test the idea might excessive loss because of its portfolio of have saved money, time and effort. Taking risk, as the next three sections reveal. One common use of alliances is to change Buy options on the future
the capabilities and strategic position of a An alliance at an early stage of industry company. Xerox, the US printer and copier transformation can also be seen as a way among enterprises that are well known for either to exit or get more deeply involved after it sees how the business develops. relatively small in this case, as is the cost of exit; but the value of the option to grow the relationship may be high. Let us take a Daimler-Benz did so in acquiring Chrysler, An option, in the financial world, is the pressure to change business capabilities right to buy or sell a security within a given when an acquisition? Differences in cost a pre-arranged price. It is not a definite apart, these alternative strategies manage commitment do anything. If the option is not exercised within the period, it expires. The chief value of the option comes from risk of setting off in the wrong direction Consequently, the higher the uncertainty and the risk of stumbling badly, even when the higher the value of this flexibility. mean lower "transition costs" in both Corning Glass used alliances as options to situations. An alliance lets a company test explore and ultimately take leadership in optical fibres. When it started research on this technology in the 1970s, the idea of move. This is generally less costly than transmitting information in the form of light acquiring a company and then divesting it. pulses through a glass fibre had not been An alliance also helps transfer knowledge maintains an interest in the business; an telecommunications companies and research outfits to reduce technical solution. After it gathered new information, alliances, this time with early users and Here too alliances were useful in dealing with risks that are inherent in the project. alliances reduce business risk directly, the optical cable company that soon rose particularly in hotly-contested internet to a dominant position in the industry. By technologies, is by helping rivals agree on 1999, Corning's interest in optical fibres protection offered by alliances is never "exercise" its option fully to own and free. Aside from the out-of-pocket costs of organisational strategy itself implies taking Manage business risk directly
In our fifth strategy, alliances can actually Relationship risks in alliances
improving a project's chances of success. allies that turned into rivals. We need not the others; a company may do what it can emphasise that a poor structure or partner start, nor that insufficient attention to post- promising relationship. Still, it may be and in university laboratories primarily to share risks and hedge their bets. At other times, however, they get deeply involved • Avoid "co-opetition": the risk of coaching it in marketing, the regulatory management of risk is reflected in complex payments, designed to guide the start-up while also creating an option-like flexibility The deal between Abbott Laboratories, the Pharmaceuticals, a US-based joint venture that initially would have access to all of Takeda's R&D for use in the US market. approach to alliances, as it was uncertain commercially viable in the US. Abbott did not just sit by and watch the uncertainties resolve themselves. Instead, it helped TAP drug approval process at the Federal Drug eventually developed Prevacid ®, a block- Alliance strategy
have one thing in common: they treat the alliance, in this view, is much more than "the deal" that is typically announced with point: Companies should build "alliance strategies" not "strategic alliances". The difference is not semantic. Every manager has seen how excessive focus on the deal can lead to neglect of the strategy behind the deal. Why are we participating in an "constellation" of allies? How will we support it internally? These key questions Effective use of alliances to manage risk Further reading
"Managing Risks in Strategic Alliances," Academy of Management Executive, Vol. Gomes-Casseres, Benjamin. The Alliance Revolution: The New Shape of Business Rivalry. (Cambridge, Mass.: Harvard Spekman, Robert E., Lynn A. Isabella, and Benjamin Gomes-Casseres is a
Competence: Maximizing the Value of your Partnerships (New York, NY: John "The Alliance Revolution" and a consultant to leading high technology companies. He

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