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Is Your Company Over-Allianced?

(originally published by Booz & Company)

Alliances represent a powerful strategy opportunity for a company to profit from new markets or new technologies. But just as firms should know they can’t buy success with multiple acquisitions, they should know they can’t partner their way to success either. Every company can manage only a limited number of alliances.

Alliances serve many purposes and vary in structure and complexity (e.g., from simple licensing arrangements to equity joint ventures). But all alliances are based on some exchange of knowledge, in addition to a flow of products, capital, or technology. In the drug industry, for example, small research-focused biotechnology firms often ally with big pharmaceutical companies that have manufacturing capabilities and sales and marketing networks. Such a relationship serves both parties well. Among the earliest of biotech alliances was the 1978 agreement between Genentech Inc. and Eli Lilly and Company, in which Lilly licensed the rights to produce and market recombinant human insulin based on Genentech’s research in recombinant DNA technology. At the time, Genentech was too small to effectively bring the novel treatment to market.

But victory with one alliance doesn’t mean a firm has an infinite capacity to manage multiple relationships. Although a portfolio of alliances can be powerful, too many deals or too much variety can undermine this power. That’s because the ability to manage alliances does not scale. In fact, beyond a certain capacity, the returns on all of a company’s alliances diminish.

It’s easy to see why: Engagement in more and more alliances raises the complexity of the managerial task, overwhelming managers’ ability to coordinate multiple alliances and learn from them. Yet few companies carefully consider this challenge. Large pharmaceutical companies, which are used to collaborating with external partners, have only recently turned their attention to managing their alliance portfolios. Eli Lilly has led the pack by creating an alliance management function and designating an individual, the alliance manager, to capture and internally disseminate new knowledge gained across multiple relationships.

The extent to which knowledge flows between partner firms is an essential consideration when companies are thinking about adding another partnership to the portfolio. The limit of alliance capacity is reached sooner when many relationships in a firm’s portfolio require deep knowledge exchanges. Aventis, the pharmaceutical company formed by the merger in 1999 of Hoechst AG and Rhône-Poulenc SA, goes so far as to give its alliance managers a tool to help assess whether a relationship will require multiple interfaces with the partner to be successful. Simple licensing arrangements don’t tax alliance partners very heavily, in part because the arrangements are easily codified and the scope is clearly defined. But R&D partnerships and joint ventures can place much higher demands on participants, particularly in the face of uncertainty as to the type and scope of future alliance activities.

The Danish toymaker Lego Company has actively sought partners to extend its position beyond its struggling Lego building bricks franchise. Its alliances include business partnerships with Microsoft, Nestlé, Miramax, and Nike, to name a few. The contributions required of each partner in these relationships are precisely defined to ensure there are few surprises and to reduce the management demands on Lego executives.

Future Lego alliances, however, will be more ambitious and will more closely resemble the company’s current collaboration, announced in December 2001, with Electronic Arts, one of the world’s leading interactive entertainment software companies. Under the global agreement, Electronic Arts will copublish and provide marketing support for more than 30 Lego software titles on a minimum of four platforms over a three-year period. Collaborations like the Lego–Electronic Arts alliance will be more intensive and provide greater opportunities for learning; Lego will learn from its partners about radically different markets while it will contribute its knowledge of the young children’s market and the core values that underlie its trusted brand. By thoroughly evaluating its alliance capacity when contemplating future relationships, Lego can continue to form partnerships without overwhelming its managers.

Multiple alliances still present many pitfalls, however. An organization’s internal complexity can hamper its external alliance capacity. That is to say, the more compartmentalized a company’s activities, the more difficult it is for the most crucial benefit of an alliance — the flow of new knowledge — to find its way to the people who can best leverage it. Pfizer Inc. tested the drug sildenafil citrate as a treatment for angina, discovered in clinical trials that it could be used to treat erectile dysfunction, and then developed Viagra. Would such information on desirable side effects have reached the right marketers at Pfizer had the drug been developed by a biotech partner and clinical trials been conducted by a contract research partner? These information flows are difficult enough to manage within a large organization such as Pfizer; doing so only gets harder when an alliance partner is involved. Pfizer got it right with Viagra, but how many other companies have lost opportunities because a partner was unable to convey key information to the right decision maker?

Another barrier to developing alliance capacity is the diversity of alliance partners. Experience gained from managing one partner cannot always help improve the management of another relationship. Pharmaceutical firms, which now place a significant portion of their R&D budget in alliances with biotech partners, face an array of partnerships with firms that focus on different geographical, disease, and technological segments. The challenges of coordination and the concomitant costs of R&D are likely to increase when companies have to build bridges among multiple partners as well as between those partners and themselves.

Profitable partnerships aren’t like Lego bricks that can be stacked ever higher. Companies must systematically analyze organizational complexity and partnership diversity, and identify and remove barriers to knowledge flow. That’s how they can build stable — and profitable — alliance portfolios.

Ha Hoang,
Ha Hoang is associate professor of entrepreneurship and the Rudolf and Valeria Maag Fellow in Entrepreneurship at INSEAD.
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