Capturing Value from Alliance Portfolios

DOVEV LAVIE Faculty of Industrial Engineering and Management Technion Israel Institute of Technology Haifa 32000, Israel Email: dlavie@ie.technion.ac.il

First version: December 19, 2007 Revised: March 25, 2008 Accepted: April 11, 2008 Forthcoming in Organizational Dynamics

I would like to thank Alan Button, Andre de Souza, Ari Dotan, Mike Hendron, Mark Hanny, and Christoph Lechner for offering feedback on this article. I would also like to acknowledge the financial support received from the New York Metropolitan Research Fund, Alfred P. Sloan Foundation, the Mack Center for Technological Innovation at the Wharton School and the Penn Lauder CIBER. This article builds on my recent research published in the Strategic Management Journal, which won the 2007 Academy of Management William H. Newman Award for best paper based on a dissertation.

Capturing Value from Alliance Portfolios

EXECUTIVE SUMMARY As companies become involved in numerous alliances, managers must consider the best practices for managing alliance portfolios and capturing value from alliances. This article first suggests that the value of an alliance portfolio depends primarily on the characteristics of partners that managers seek, and then proceeds by examining the important distinction between value-creation and value-capture strategies in alliance portfolios. It demonstrates how companies can create value by enriching, combining, and absorbing the network resources furnished by their partners. However, resource-rich partners often enjoy relatively strong bargaining positions that limit companies abilities to capture value from their alliance portfolios. Still, companies can cope with this hazard by avoiding direct competition with powerful partners while encouraging competition among these partners. Finally, this article offers a simple framework for managing alliance portfolios that advocates separation, segmentation, and coordination of alliances. To effectively leverage this framework, managers need to change their mindset and shift from treating alliances independently to designing alliance portfolios and taking into account latent yet critical interdependencies across their companies alliances.

Many companies rely on alliances for their operations and long-term success. Whereas alliances traditionally served specific short-term needs, today companies build extensive alliance portfolios that involve multiple concurrent alliances. These alliances take various forms, such as joint ventures, collaborative R&D projects, and joint marketing engagements. For example, Oracles PartnerNetwork (www.oracle.com/partnerships) includes 19,500 alliance partners that serve as independent software vendors, platform partners, system integrators, resellers, and distributors. Clearly, not all of these alliances are strategic for Oracle or hold the potential of becoming long-term relationships, but Oracle still faces the challenge of designing and coordinating a complex web of alliance partners. Indeed, my recent research demonstrates that the percentage of software companies engaged in alliances rose from 32% to 95% while the average number of alliances per company increased from 4 to more than 30 during the past decade (see Figure 1). Alliance portfolios, defined as a companys collection of immediate alliance partners, can potentially contribute to corporate performance by providing access to new resources and markets, generating economies of scale and scope, reducing costs, sharing risks, and enhancing flexibility. However, between 40% and 70% of alliances fail to achieve their objectives according to most studies. As companies extend their alliance portfolios by bringing in more partners, managerial challenges amount. The challenge of coordinating multiple alliances has prompted managers to formalize their alliance programs and establish corporate alliance functions. For instance, Hewlett-Packard has been involved in numerous alliances since the late 1980s, but initially its corporate management did not attempt to assimilate best practices for managing alliances in its various business units. As managing alliances has become more challenging in the 1990s, Hewlett-Packard established a corporate function headed by a vice president of global alliances. This dedicated unit developed best practices that included 60 different toolkits, such as a 3002

page manual to guide alliance managers throughout the alliance lifecycle. Although such efforts can increase companies success rates somewhat, overall alliance success rates have remained low. Given this poor performance record, managers whom I interviewed were still concerned about capturing value from their alliance portfolios: How can an alliance portfolio be designed to boost corporate performance? Surprisingly, some studies suggest that the success of an alliance portfolio depends less on managerial practices and more on the nature of partners with whom a company decides to ally. For example, a Data Quest survey of 455 CEOs reported in the Alliance Analyst Newsletter confirms that partner selection is considered the number one success factor in alliances. Geert Duysters and Koen Heimeriks published a more recent survey of 151 executives in charge of alliances which reveals that the inability of partners to deliver expected competences is considered the number one reason for alliance failure. These failures occurred despite the fact that 89% of the surveyed companies had a formal alliance program in place. Clearly, managers need to focus on partner-selection decisions and devise partnering strategies to leverage their partners resource endowments and to capture value from their alliance portfolios. But what can they do to achieve these goals? Insert Figure 1 about here In studying how companies capture value from their alliance portfolios, I leveraged qualitative and quantitative research methods. I first studied the alliance portfolios of a select group of companies such as Unisys, Vignette, National Instruments, and Cadence Design. In each company I conducted more than a dozen personal interviews with vice presidents, directors, and managers at various business units. I also issued a comprehensive questionnaire to all the alliance managers in each company, analyzing more than 400 responses to identify relevant success factors in alliances. Additionally, I collected data on the alliance portfolios of 367 publicly-traded 3

companies operating in the U.S. software industry during the years 1990 through 2001. In total, my sample included more than 20,000 alliances involving about 8,800 unique partners. Most of the companies in this sample operated in the prepackaged software industry segment (69%) or the computer integrated system design segment (23%), with a few companies engaging in computer processing and data preparation services (5%) or computer programming services (3%). On average, a company reached $1,068 million in market value, owned $412 million in assets, had $304 million in annual sales, employed 1,730 employees, and spent $38.4 million on R&D and $8.5 million on advertising. On average, companies were in business for 14 years and maintained a portfolio of 15.7 partners. I considered companies annual change in market value as a performance outcome, examining how network resources, such as partners technology, marketing, financial, and human assets and reputation, impact companies market performance. I also studied how companies market performance is influenced by the relative bargaining power of their partners, the competitive tension between each company and its partners, and the competition between various partners in the alliance portfolio. Based on this multi-year research I identified value-creation and value-capture strategies that can guide partner selection decisions, and developed alliance portfolio management practices to help managers extract more value from their alliance portfolios. My framework suggests that in order to create value, managers should leverage the complementary resources of alliance partners using three strategies, namely enrichment, combination, and absorption. However, the ability to create value with partners does not guarantee that these strategies will pay off. To capture value, managers must leverage their bargaining power in the competition that emerges both with and among partners in the alliance portfolio. Finally, successful portfolio management entails recognizing interdependencies across alliances in the portfolio and using separation, segmentation, and coordination practices. I next explain the distinction between value creation 4

and value capture and then discuss the above recommendations in detail.

VALUE CREATION VERSUS VALUE CAPTURE

Given the potential benefits of alliances, managers often assume that building a portfolio of alliances can enhance corporate performance. Surprisingly, this assumption has received limited support in empirical research, partially because of the high failure rates of alliances but also because some companies fail to capture value from successful alliances, leaving the lions share of the proceeds from the collaborative effort to their partners. For example, the buyersupplier relationships between Toyota and its suppliers in the automobile industry are considered successful by all means, but Jeff Dyers research suggests that Toyotas rate of return is almost twice that of its suppliers. Indeed, industry and consumer surveys rate Japanese car manufacturers higher than American manufacturers with respect to vehicle quality and value, leading to strong financial performance. However, like their American peers, Honda, Nissan, and Toyota also place considerable pressures on their auto part producers to offer price concessions that impact the long-term viability of these partners. Only about half of these price concessions can be attributed to productivity improvements, with the rest being outright discounts. Such evidence brings to question the conventional wisdom that industry leaders are the most valuable associates. My findings reveal that while dominant partners can contribute to value creation in alliances by furnishing substantial resources, they may capture a larger share of that value at the companys expense. For example, many companies strive to become Oracles alliance partners, but as Oracles worldwide head of Alliances and Channels notes, these partners often realize that Oracle may have benefited at their expense: Sure, Oracle competes with us that we can manage. But sometimes they dont play nicethey take our lunch and run with it. Thus, managers must distinguish between value-creation strategies and value-capture strategies

when developing their alliance portfolios. Managers that devote most of their attention to value creation may find themselves subsidizing their partners. Value-creation strategies enable a company and its partners to generate value from their relationships by collectively pursuing shared objectives and extending the range of their value chain activities. Often, these activities cannot be implemented independently by individual participants in alliances. As in the case of Toyota and its partners, when partners assign dedicated and trained personnel to their alliances, integrate their manufacturing processes, make necessary adjustments to product designs, or develop organizational procedures for sharing knowledge and resolving emerging conflicts, such investments contribute to the success of the alliances and increase the overall value pie available to both the company and its partners. Jeff Dyer has suggested that value-creation strategies account in part for the success of Toyota and Honda in conquering market share from the hands of Detroits Big Three in the United States. In turn, value-capture strategies do not create new value but rather determine how much value a company can extract from its alliances relative to its partners. Although alliances are collaborative in nature, value-capture strategies often lead to tacit competition, also known as coopetition, in which partners competitively attempt to increase their share of the value generated in the alliance. For example, negotiating higher license fees, requiring excessive resource investments from partners, imitating partners product designs while protecting ones own proprietary knowledge, or limiting the sharing of market information with partners, are considered actions that may contribute to the companys ability to capture a larger share of the value pie. Gary Hamel offered several examples of American companies that eventually figured out how their Japanese partners pursued value-capture strategies in their joint alliances. As one manager put it: We established them in their core business. They learned the business from us, mastered our process technology, enjoyed terrific margins at home, where we did not compete in 6

parallel, and today challenge us outside of Japan. In a similar vein, I interviewed a Philips executive who has been involved in joint ventures with Japanese partners. This executive referred to a Japanese saying about cooperation: sleeping in the same bed but dreaming different dreams, which illustrates the distinction between value creation and value capture. In sum: Value-creation strategies generate benefits which are shared by the alliance partners. Value-capture strategies determine how these collective benefits are split between the partners. Since managers are first and foremost responsible for the bottom line of their own companies, building alliance relationships is desirable only as long as a company can capture value from its alliance portfolio. If partners are able to capture most of the gains and perhaps compete directly with the company in the future, the consequences can be devastating. One of the companies that have learned this lesson the hard way was IBM in the personal computer (PC) industry. In 1981 IBM adopted Intels microprocessor architecture and partnered with Microsoft, then a start-up company, to develop the operating system for its PC. Although this alliance helped IBM reach a market share of 42% by 1983, it established Microsoft and Intel as dominant players in this industry and opened the way for IBM clones, which eventually forced IBM to discontinue its PC product line. Although IBM initially rejected Intels 386 microprocessor in 1986 and subsequently introduced its own line of PS/2 computers, this attempt failed to revert the market trend which favored the Wintel standard. In fact, in 1992 IBM announced the formation of Taligent, a joint venture with Apple that sought to develop an operating system that would compete with Microsofts Windows. Even though Hewlett-Packard joined IBM and Apple in 1994, the partners failed to introduce a viable alternative to Windows, and in 1997 IBM shut down the Taligent project. Managers should bear in mind that alliance agreements are rather informal and cannot

provide full-proof protection against opportunistic behavior by partners. Therefore, companies should pay attention to whom they partner with. Are these partners likely to contribute to value creation or rather impose obstacles by employing value-capture strategies? Companies that manage alliance portfolios with multiple partners should be especially alert to these issues since their corporate performance depends on their alliances to a great extent. VALUE-CREATION STRATEGIES IN ALLIANCE PORTFOLIOS Managers typically seek out partners that can furnish ample resources to an alliance. An alliance portfolio composed of such partners provides access to an extended set of resources, including human resources, financial assets, production facilities, marketing contracts, R&D investments, and reputation. Although these network resources are owned by partners, a company can access them via its alliance relationships. Complementarity Not all network resources have the potential to create value. Only complementary resources have this potential. For example, in the software industry, companies specialize in the development of intellectual property based on their proprietary technology and human talent. Alliances enable software companies to integrate software components, embed them in systems, resell and implement solutions, as well as engage in collaborative marketing initiatives. For this reason, the marketing and financial resources of prominent partners contribute to software companies market success, whereas the technology and human assets of partners contribute less to the performance of software companies. In contrast, new technology development and economies of scale in production are essential for the success of alliances among semiconductor companies, which makes large and innovative partners more attractive for value creation purposes. For instance, IBM has recently established a multi-partner alliance with AMD, Chartered, Freescale, Infineon, Samsung, STMicroelectronics and Toshiba, to share the enormous 8

development expenses associated with the 32nm chip technology and support mass production and manufacturing. Thus, managers should look for partners that bring complementary resources rather than those who are simply rich with various resources. Understanding the companys needs and becoming familiar with the resources of prospective partners are essential for making the right partnering decision. Since partners resources are not always visible to outsiders, partnering decisions should not be based merely on a partners reputation and acknowledged market position but also on careful scrutiny of its resource base, much like the due diligence process that a company would conduct with a potential acquisition target. For instance, Cisco has been well known for its success in managing acquisitions, yet its Strategic Alliances group also developed a clear roadmap for assessing prospective alliance partners before making partnering decisions. Cisco would consider alliances only when the partner possesses a technology or functional expertise that complements Ciscos competencies and when Cisco has limited in-house knowledge of the technology or service in question. The remaining question then is how can a company leverage such network resources? My research reveals that once alliance agreements are signed, companies can leverage the complementary resources of their partners by pursuing three value-creation strategies: enrichment, combination, and absorption. Enrichment Strategy Complementary network resources directly enrich a companys value-creation opportunities by supporting the commercialization of its products or enhancing its service offerings. A company can rely on its partners salespeople to complement its primary marketing channel, leverage its partners advertising campaigns to reach new customers, incorporate its partners technologies in new products, or use funding from partners to advance its own R&D projects. The enrichment strategy creates value by extending the companys range of market 9

opportunities and by furnishing specialized resources that are otherwise unavailable or difficult to develop internally. The joint venture between Nestle and Coca Cola best illustrates this strategy. Seemingly, both Nestle and Coca Cola are dominant players in the beverages industry. A careful look will reveal however that each company stands to gain from the complementary assets of its long-time rival. Since this alliance was established in 1991, Nestle has been using Cokes established worldwide distribution infrastructure while Coke has been leveraging Nestles brand and R&D to enter the milk-based beverage segment. Combination Strategy A company can create synergies by combining network resources with its own resources. Such combinations enable the company to draw network resources as needed at the cost of maintaining its relationships with partners. Unlike mergers and acquisitions that lock-in the company into certain other companies, alliances offer a viable alternative and greater flexibility in accessing external resources. In addition, a company can create value by combining network resources of different partners in its alliance portfolio. For example, a company that specializes in systems integration may combine the hardware platforms of one partner with the software development expertise of another in its implementation projects. One issue to consider is that partners may not be willing to commit certain resources to the alliance, at least at the outset. Nevertheless, interpersonal relationships that emerge in alliances can serve for releasing withheld resources at some later point. Indeed, many strategic alliances were born as simple arms-length transactions. For example, after Unisys had won a contract for reselling Cisco switches in 1993 it began to develop integrated solutions based on the Cisco architecture. During 1995 it worked with Cisco to run its IOS software on its A Series server line, and eventually in 1999, Unisys and Cisco jointly invested in a center of excellence that offered solutions such as a complete end-toend IP-based infrastructure for telecommunications operators. Thus, network resources and the 10

synergies that they produce become available as the alliance unfolds. Absorption Strategy A company can leverage network resources in growing its own resources. For example, a company can rely on prominent partners to enhance its legitimacy and capacity to acquire additional resources or attract new employees. By observing and learning the skills and the external knowledge that partners bring to the alliance, over time, the company can assimilate and accumulate these resources internally. It can learn how to develop new skills and capabilities based on its partners knowledge base and experience. I interviewed an alliance manger who described this absorption strategy: Dell has made us better. They have forced us to look internally at things that we would have probably not looked atto get better instead of being a classic mainframe company working in the desktop space. They have forced us to be more efficient because they are a very cost-driven corporation. They made us look at different models in our business, and as a result of that they made us more effective and helped us reduce costs. In this case, the company in question gained value indirectly as a result of its alliance with Dell. These performance enhancements did not come at Dells expense and are therefore considered an outcome of value creation rather than value-capture strategies. My research findings confirm that software companies that mastered the enrichment, combination, and absorption strategies had better chances of enhancing their overall market performance. VALUE-CAPTURE STRATEGIES IN ALLIANCE PORTFOLIOS Coopetition The challenge that many companies face in developing their alliance portfolios derives from the following paradox: prominent partners that are able to make the greatest contribution to value creation in alliances may also possess superior bargaining power which they can use to capture a disproportionate share of the value. It may well be the case that partners that offer the 11

most valuable resources are not the best associates. The ongoing tension between cooperative and competitive pressures in alliance portfolios calls for coopetition, in which companies work with their partners but maintain a healthy wariness of their intentions and maneuvers. My research findings uncover three value-capture strategies that companies can use to secure their interests in alliance portfolios, namely: enhancing bargaining power, avoiding bilateral competition, and leveraging multilateral competition. Bargaining Strategy Strong bargaining power allows companies to reach favorable terms in alliance agreements, obtain concessions from partners, and influence the outcomes of negotiations. A vice president of a software company that specializes in content management applications offered an example: Accenture is huge and we are not. They think they can dictate terms. Accenture does not want to have any of our professional services on the project. As we run into problems with projects the customer ultimately holds us responsible because it is our software. Hence, a company that brings powerful partners into its alliance portfolio may find itself getting limited returns on its investments. How can managers assess the relative bargaining power of their prospective partners? They should examine the interdependencies between the company and each partner, consider which side has a greater stake in the alliance, and assess whether the company or the partner in question has alternative alliances that might substitute for their joint alliance: When the outcomes of alliances are more important to the company than to its partners, the company becomes more dependent on its partners, who may in turn negotiate more favorable terms for themselves. When partners have better access to alternative relationships, they can obtain equivalent and even greater benefits outside of their alliances with the company. Since they can ally with

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many companies, they face lower switching costs and have real exit options, which reduce their dependence on the company in question. Therefore, a company with fewer alternative alliances relative to its partners has limited bargaining power and thus limited ability to capture value from its alliance portfolio. One of the alliance managers that I interviewed offered a vivid example of these dynamics: September 2000 was probably the peak of that period where companies thought they had to have a relationship with Ariba, that having access to Ariba software is almost a license to printing money. Many companies bought these licenses without having any tangible plans for implementation. When Ariba recognized this, they developed a new model for reseller and coseller relationships. This model assumed that it is so valuable to have access to Aribas software that they can extort money from their potential partners simply for accessing it. They received tens of millions of dollars for the right to resell or co-sell their software. This was a ludicrous situation. We paid too much for it without really having full understanding of what we were getting into. This example demonstrates how a start-up company can build a strong bargaining position by offering unique technology and attracting an extensive number of partners. One of the challenges in developing such bargaining strategy is that the balance of power between a company and its partners may change during the course of alliance due to technological changes or trends in consumer behavior. For example, many proprietary hardware companies have suffered a decline in their relative bargaining power with the emergence of open systems, as an alliance manager noted: Most of our alliances are now with large software companies and system integrators. Companies like Accenture, CGE&Y, EDS. We are the little guy. If a customer wants to run its business he will probably go to SAP, Accenture or other big companies who have software or provide consulting. Only then he will talk to hardware providers such as Sun and IBM. The roles have been reversed in the past ten-twenty years. Our company 13

has less bargaining power than it used to have. Companies, such as IBM have dealt with this challenge by entering the software development and systems integration businesses. Managers should thus monitor the relative bargaining power of their partners as they continue to haggle with these partners for their share of potential gains from alliances. In sum, my research findings reveal that relative bargaining power greatly impacts the value that a company can extract from its alliance portfolio, with a one standard deviation increase in the relative bargaining power of partners resulting in a 21% decrease in the companys market value. To improve their companies bargaining positions, managers need to pursue strategies for allying with partners that are highly dependent on their joint alliances with the company and that otherwise enjoy limited alternative partnering opportunities, such as in the case of partners that depend on the companys unique technology or exclusive customer contracts. Bilateral Competition Strategy Managers need to worry about their partners superior bargaining power especially when they compete with these partners in the same industry. Bilateral competition between a company and its partners motivates partners to maximize their payoffs in alliances at the companys expense. Partners may behave opportunistically and seek to imitate or capture the companys resource endowments instead of focus on collaboration. This may have been one of the reasons for the failure of Taligent, as the former marketing director of Taligent noted in an interview for Business 2.0 magazine: Both Apple and IBM had competing projects in-house. This left us fighting to establish control. The partners didnt have their best people focused on the effort. Decisions were slow to come by, and feedback was always inconsistent. Thus, the tension between partners that compete in the same industry can often endanger an alliance. Nevertheless, bilateral competition per se is not necessarily hazardous since the company 14

may still have an upper hand in value capture contests. Only when partners both compete in the companys industry and enjoy superior bargaining power, providing both the motivation and ability to reduce the companys share of joint benefits, is the company likely to witness a decline in its performance. In one of my interviews an alliance manager described the challenge that his company faced when collaborating with IBM: We are systems integrators and they have a large systems integration arm as part of their global services groupIf there is much competition between us at the account level, it makes it very likely that the partnership will not last more than six months. Its difficult to succeed if we cannot find a niche where we can decide to go and work together. To manage bilateral competition managers must devise strategies that enable their companies to avoid powerful partners that operate in their companys own industry. Multilateral Competition Strategy As much as competitive tension in alliances can do harm, managers can use it in their favor by nurturing competition among different partners in the alliance portfolio. An alliance manager whom I interviewed described such a multilateral competition strategy: I am working with IBM, BEA and Microsoft. Each one of them has a lead product in this interactive development environment. All compete head-to-head with each other, and we work with all three of them as strategic partners. This brings greater value to us. How much value? My research findings suggest that a one standard deviation increase in multilateral competition in the alliance portfolio can lead to a 15% increase in the companys market value. Multilateral competition strategies involve allying with multiple partners that offer similar products and services. Although such overlap may lead to inefficiency and redundancy in the alliance portfolio, it can improve the companys ability to leverage competing interests among partners and reduce the risk of opportunism on their part. In a situation where partners compete for the companys business, resources and attention, the companys managers enjoy greater 15

discretion in selecting partners and allocating resources to particular alliances. Partners that engage in multilateral competition know that they must be willing to make concessions if they do not want the company to switch its attention to its other alliance partners that directly compete with the partners in question. For this reason, companies such as Oracle have been traditionally able to effectively control their numerous alliance partners. Most of their system integrators realized that they should be lucky enough to win an implementation project and accepted Oracles terms in light of the fierce competition among Oracles prospective system integrators. Nevertheless, not all companies can leverage multilateral competition to play partners against each other. Companies that lack relative bargaining power gain little from such strategy, as a vice president of corporate alliances noted in an interview: For us to position ourselves to play multiple partners against each other where we are not the market leader would cause unrecallable damage to our reputation as a partner. We cannot afford to do that just to win tactical engagements. Indeed, if partners have a greater number of alternative alliances than the company, or are less dependent on their joint alliances with the company, the company may lose more than it gains from trying to leverage the competitive tension among its partners. Partners may leave the companys alliance program or retaliate by leveraging their bargaining power in negotiations with the company. The company may also face difficulties in attracting new partners that have learned about its strategic behavior. Therefore, when bringing partners into the alliance portfolio, managers need to make sure that their company becomes involved with the right partners. Such partners can help the company improve its bargaining position vis--vis existing partners. Bilateral competition increases the chances that partners will leverage their relative bargaining power to gain concessions from the company, whereas multilateral competition attenuates this hazard, and thus improves corporate performance. Insert Figure 1 about here 16

MANAGING ALLIANCE PORTFOLIOS Thus far this article has revealed that managing an alliance portfolio is not an easy task: Alliance managers need to simultaneously pursue value-creation and value-capture strategies. They need to overcome the natural tendency to seek big-shot partners. At the same time they must ensure that their partners can offer complementary resources. Finally, alliance managers may accommodate prominent partners in their companies alliance portfolios as long as they avoid direct competition with them or attract additional partners that compete with those partners in order to maintain their ability to capture value. However, the challenges that managers face do not conclude when alliance agreements are signed. Rather, additional challenges emerge that require continuous balancing of interdependencies across alliances in the portfolio. Managing Interdependencies Managers need to consider how each partner in the alliance portfolio influences the companys engagements with other partners. When a partner is selected to pursue a certain collaborative initiative, competing partners in the alliance portfolio may show discontent and perhaps even withhold cooperation. In response, the company may be able to restrict these partners ability to exploit their power in bilateral engagements by reducing its dependence on them. However, multilateral competition strategies are also available to the companys partners, who may in turn engage in alliances with the companys own competitors. For example, as Sony increases the number of competing video game developers for its PlayStation platform, some game developers in Sonys alliance portfolio may try to balance Sonys enhanced bargaining position by allying with Sonys competitors and migrating their software to Microsofts Xbox and Nintendos GameCube platforms. By doing so, these developers balance multilateral

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competition in Sonys alliance portfolio with multilateral competition in their own portfolio. The implication is that alliance managers also need to monitor and be familiar with other alliances in their partners portfolios. Managers tend to view alliances as independent engagements with a short time horizon relative to other corporate activities such as mergers and acquisitions, but as this example demonstrates, such a perspective jeopardizes their ability to extract value. To enhance corporate performance they must consider the alliance portfolio as a whole rather than assume that alliances are independent of each other. Indeed, multilateral competition strategies create unique managerial challenges. One challenge faced by corporate executives is how to convey a coherent image of the alliance portfolio and account for the companys partnering choices, as a director in one of the companies I studied suggested: Many companies encounter problems because they have too many competing partners that they try to manage. This confuses the market players and customers. Creating a coherent understanding of the alliance portfolio within the company can be equally challenging. Alliance managers themselves may find it difficult to reconcile competing engagements with their commitments to various partners. For example, a manager responsible for her companys alliance with Dell noted: Our company also has some relationships with Gateway, which is Dells major competitor. I dont know what exactly we do with Gateway. I think that the less I know about that the better off I am, because I dont want to have any conflicts. I need to support my alliance. Such an approach, as patriotic as it may seem, does not allow a company to maximize the value of its alliance portfolio. Conflicts need to be resolved rather than ignored. To address these issues, companies can adopt separation, segmentation, and coordination practices. Separation Separation requires a manager to provide assurance to competing partners that the 18

company is discrete, circumspect, and evenhanded in its dealings with all partners. For instance, when partners are concerned about their proprietary knowledge or business information leaking to the hands of their competitors through their ties to the company in question, the company may assign different alliance managers to competing partners and institute organizational and technological buffers to prevent such leakage and help nurture trust between the company and its partners. A vice president of a large computing company that engages with competing partners explained: There are completely separated teams working on these competing engagements, with firewalls and other governance systems in place. Partners trust us to manage these relationships appropriately because this is an accepted practice in the industry and they do the same. Separation practices require the nurturing of trust between the company and its partners as well as the ability of prospective partners to impose social sanctions in case that they identify a delinquent company that deviates from established norms in its industry. Segmentation Although separation may encourage competing partners to join a companys alliance portfolio it does not resolve the problem of choosing a particular partner for pursuing an emergent market opportunity. In this case, managers need to benchmark competing partners based on predefined criteria, such as based on the partners technical competencies or market access, in order to identify the most appropriate partner for a certain market segment. Using segmentation practices to pick best of breed partners to target certain market segments also helps managers explain customer engagement plans to field employees. For example, an alliance manager at Unisys described how he maps alliances to different market segments based on product categories and geographical location: We are trying to find the best partner for the certain niche that we identified for that partnership. We have a lead partner per niche, because it is difficult to have the same lead partner in every geography worldwide. We tend to have on a 19

region-by-region basis one or two partners per niche. This approach eliminates redundancy while rationalizing the task of matching partners with market opportunities. It still leaves room for negotiation and consideration of customer preferences, as that manager explained: At the end, two or three partners might feel that they have strong play at the account, and we have to arbitrate in some way and decide which way we are going to lead. Typically, clients are going to choose only one of these partners, and we avoid the problem at the client level. There is a fine line between creating opportunities with alternative partners and introducing potential conflicts and redundancy to the alliance portfolio. Managers should monitor their alliance portfolio and form, maintain, or dissolve competing alliances as the companys business evolves. Coordination In some cases, competing partners collaborate with different business units of the company. In such cases, managers need to coordinate alliance engagements at the corporate level. In recent years, many companies have established dedicated alliance functions to manage their alliance portfolios. According to Jeff Dyer, Prashant Kale, and Harbir Singh, these units monitor alliance performance, independently advise alliance managers as well as accumulate and assimilate best practices across alliances. I argue that in addition, such a unit can play an important role in the overall design of the alliance portfolio and in the coordination of activities among different business units and partners. I interviewed a director of corporate alliances who described such coordination emerged in his company: We identified the top 12 to 18 partnerships that would address multiple business units. There was no centralized management of those partnerships. It was a truly collaboration effort amongst the business unitsThey managed it without much interaction. On a quarterly basis you would see them coming together to talk about things that were going on, to make sure that there was no conflictToday, there is a dedicated full-time alliance managerand he is working closely with our corporate-level 20

relationship manager. Clearly, the coordination of activities across alliances becomes critical when the company engages with numerous partners, especially when some of these partners maintain multilateral competition. Therefore, coordination becomes essential especially when a companys dealings with a particular partner involve multiple business units. In this case it is possible that one of the companys business units enjoys a superior bargaining position while another is disadvantaged in its collaboration with the same partner. It is the role of the corporate office to leverage the companys position in one business to improve its bargaining position in another business in which the company collaborates with the same partner. Oracle is a case in point since it has separate business units offering Enterprise Resource Planning (ERP) systems and relational databases. Often, a project would involve a combination of database products and ERP applications, in which case Oracle can leverage its foothold in one of these markets to achieve favorable terms from the system integrator that is in charge of the implementation project. Even though not all alliances require the intervention of corporate executives, executives that oversee the companys alliances must be at least aware of the various alliances their company is engaged in so they can intervene as needed. Such familiarity is also necessary in order for managers to be able to shape and monitor the development of the alliance portfolio. Whereas many managers recognize the importance of managing alliance portfolios, very few attempt to proactively design alliance portfolios. Most corporate alliance directors and vice presidents whom I interviewed tended to focus on supporting the companys most strategic alliances instead of engaging in coordination of different alliances in their portfolio. Managers need to shift from the traditional mindset of viewing alliances as ad hoc arrangements that serve specific needs, and adopt an alliance portfolio perspective wherein alliances are seen as an inherent element of the companys organization. This article suggests that to capture value from 21

alliance portfolios managers need to consider both value-creation and value-capture strategies as well as pay attention to interdependencies across alliances (See Figure 2 for a summary of managerial implications). Insert Figure 2 about here CONCLUSION Managers whose companies engage in multiple simultaneous alliances often realize that these alliances cannot be managed independently. To fully capture value from their alliances managers must carefully design their companies alliance portfolios. This article builds on recent research to offer guidelines for managing alliance portfolios. Whereas most other frameworks place emphasis on practices for nurturing productive relationships with partners, this article directs attention to partner selection decisions. The ideal partner should possess valuable resources, but in order to determine the extent to which such network resources are indeed valuable a manager must recognize how network resources can be combined with the companys own resources, enrich these internal resources or support the development of new resources. The paradox is that resource-rich partners often leverage their superior bargaining positions to capture most of the value that a company derives from its alliance portfolio. For this reason managers must concentrate on devising value-capture strategies in addition to traditional value-creation strategies. Furthermore, alliance managers tend to assess the success of their alliances based on the longevity and quality of relationships with partners instead of looking at how these alliances contribute to their companies bottom line. Indeed, it is quite challenging to measure such contributions. Therefore, this article outlines value-capture strategies that companies can follow in order to gain from their investments in alliances. Even though a companys relative bargaining power may change over time or with dynamic industry conditions, managers are advised to pre22

select partners that are highly dependent on their alliances with the company or that lack attractive partnering alternatives. Partners that enjoy superior bargaining positions in alliances can be dangerous when competing directly with the company because they have both the motivation and capacity to limit the companys ability to capture value from its alliances. One approach that a company can follow to neutralize this hazard involves bringing its partners competitors into the alliance portfolio. Some scholars have rejected this approach by alluding to the redundancy and inefficiency that it may introduce from a value creation standpoint. However, once we take into account the importance of value-capture objectives, this practice becomes quite useful in offsetting partners superior bargaining positions. In essence, this article suggests that alliances cannot be considered merely a collaborative arrangement. Competition still plays a role in alliances, and managers must learn how to use both cooperative and competitive practices to master coopetition and capture value from their alliance portfolios. To fully leverage the competitive tension that prevails in their alliance portfolios, managers employ separation, segmentation, and coordination practices that enable them to effectively maintain interdependent relationships and resolve emerging conflicts with and amongst partners in their alliance portfolios. Regardless of whether a company establishes a dedicated alliance function or delegates partnering decisions to alliance managers, managers face the increasingly challenging task of managing alliance portfolios. Their traditional role of coordinating and monitoring individual relationships has been extended to dynamically designing alliance portfolios and subsequently managing the strategic and organizational interdependencies that emerge across alliances in these portfolios.

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FIGURES FIGURE 1. The evolution of alliance portfolios in the U.S. software industry 1990-2001
35 100%

Alliances per Company

30 25 20 15 10 5 0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

80% 70% 60% 50% 40% 30% 20% 10% 0%

Year

Companies with Alliances

90%

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FIGURE 2. Value creation and value capture in alliance portfolios

Value Creation Strategies

Complementarity Seek Partners that offer complementary resources Enrichment Strategy Leverage network resources to extend your market opportunities Combination Strategy Integrate network resources with your internal resources to create synergies Absorption Strategy Learn and assimilate network resources in order to develop new skills and capabilities

Value Capture Strategies

Coopetition Watch out for opportunistic partners that value your business more than your partnership Bargaining Strategy Seek partners that have greater stake in your joint alliances and fewer partnering alternatives Bilateral Competition Strategy Avoid partners that compete in your industry if they enjoy superior bargaining power Multilateral Competition Strategy Ally with multiple partners in particular industries to neutralize each partners bargaining power

Portfolio Management Practices

Interdependencies Consider how each alliance affects other alliances in the portfolio Separation Set organizational and technological buffers between competing partners Segmentation Benchmark partners and assign them to market opportunities Coordination Align organizational units and create a coherent interface with each partner

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SELECTED BIBLIOGRAPHY This article draws from my field research and empirical study of alliances in the software industry, which is described in detail in my recent paper: Alliance Portfolios and Firm Performance: A Study of Value Creation and Appropriation in the U.S. Software Industry, Strategic Management Journal, 2007, 28(12), 1187-1212 (Winner of the 2007 Academy of Management William H. Newman Award for Best Paper). Readers interested in reports on alliance failure rates and their causes can refer to S. O. Park and G.R. Ungson, Interfirm Rivalry and Managerial Complexity: A Conceptual Framework of Alliance Failure, Organization Science, 2001, 12(1), 37-53, as well as to G. Duysters and K. Heimeriks Developing Alliance Capabilities in a New Era in Advances in Applied Business Strategy Eds. R. Sanchez and A. Heene (Oxford: Elsevier, 2005), 131-153. Data on improved alliance success rates of companies with dedicated alliance functions is offered by J. H. Dyer, P. Kale and H. Singh, How to Make Strategic Alliances Work, Sloan Management Review, 2001, 42(4), 37-43. Otherwise, alliance failure rates have remained persistently low in the past couple of decades. In this article I also use several examples on buyer-supplier relationships from the automobile industry. Some scholars have written on alliances involving Japanese and American car manufacturers. Useful references include J. H. Dyer, Specialized Supplier Networks as a Source of Competitive Advantage: Evidence from the auto Industry, Strategic Management Journal, 1996, 17(4), 271-291. and J. H. Dyer, Collaborative Advantage: Winning through Extended Enterprise Supplier Networks (New York: Oxford University Press, 2000). In addition, readers may refer to research by G. Hamel, Competition for Competence and Interpartner Learning within International Strategic Alliances, Strategic Management Journal, 1991, 12, 83-103 and to an article published in Autoparts Report: Japanese Automakers Rank Higher Than Big Three In Recent Benchmark Study, July 19, 2002. Readers interested in 26

elaborated examples of alliance programs in the information technology sector can refer to case studies such as IBM and Apple Computer Alliance by Darden Business Publishing (UVA-M0509, 1997) and Building Partnerships: Reinventing Oracles Go-To-Market Strategy by IMD (IMD177, 2003). I found these cases useful for conveying some of the ideas discussed in this article to my Executive MBA class on Cooperative Strategy. The alliance literature is quite extensive, but only recently have scholars begun to consider the implications of alliance portfolios. Managing an alliance portfolio is more challenging than managing a single alliance, but as my article demonstrates, managers can significantly improve corporate performance to the extent that they learn how to cope with the tradeoffs and interdependencies entailed by alliance portfolios.

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Dovev Lavie is an assistant professor at the University of Texas at Austin and a senior lecturer at the Technion (Israel). He received his PhD from the Wharton School at the University of Pennsylvania. He also holds an M.A. degree from Wharton as well as M.Sc., B.Sc., and B.A. degrees from the Technion. He is a Sloan Industry Studies Fellow, a Landau Fellow, and a winner of the Academy of Management William H. Newman Award. Focusing on strategic management, his research interests include value creation and appropriation in alliance portfolios and applications of the resource-based view in technology-intensive industries (email: dlavie@ie.technion.ac.il).

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