How to Think About All Strategic Alliances — The Right Mindset and How to Make the Tough Decisions
Note: Republishing this post I shared on the Medium paid subscription a few years ago. This was originally written in August 2015.
Strategic Alliances
In the quest to build a business, alliances are key to growing quickly and building robustly. Partners with expertise, distribution, or resources that you don’t have create a huge advantage over competitors.
We’ll take a broad look at partnerships: 1) a high-level view of the healthy mindset to carry into an alliance, and 2) strategic insights for choosing the best partners and executing well on those agreements.
But First — A Companion Collection
Before we get into the goods, check out and bookmark (or better, pocket) James Cohane’s Guide to Business Development & Partnerships. He’s collected and categorized a great set of resources for those who want to go deeper into the when and how of partnerships. Huge thanks to Joe Mecca and Edson Rigonatti for sharing this awesome collection.
It’s a great follow-up to the high-level approach we’ll take here, and makes it easy to dive in by section if you’re looking for help on a particular topic.
The Mindset of Strategic Alliances
Most partnerships end in failure. They fizzle, underperform, or blow up — only the minority deliver expected (or unexpectedly positive) results to all parties.
The reasons for these failures are the interesting part. Most often, the trouble begins as a failure of mindset — one or more partners comes to the table with an attitude that sets a course for future disaster.
This is corroborated by research done by Larraine Segil, who wrote a great column in Forbes about how to avoid failures of Strategic Alliances.
My research into over 200 companies at Caltech, where I teach executive education in alliances, found that cultural incompatibility (whether differing company size, corporate culture, management personalities or national cultural differences) caused alliance failure more often than the business or financial considerations.
In order to create successful partnerships, cultivate the correct mindset — and be certain that your potential partners have done the same.
Serve Customers, Then Find Partners
Most partnership decisions begin by thinking ‘Who has what I need?’ then trying to get it. That default mindset is (clearly) not the right approach.
Leyla Seka, who runs Desk.com (now part of Salesforce) believes in approaching partnerships by thinking about whose Customers you can create the most value for. In this 30-minute talk hosted by Saastr [which was suggested by Rob McGrorty] she goes into the foundation required for healthy, beneficial partnerships:
You should be seeking mutual benefit, and it’s much easier to achieve that when you know you can deliver value for a partner.
To find out whether you can deliver value for the partner — focus on their customers. Do you (demonstrably) create something that their customers use and appreciate — and hopefully already pay for?
Have an attitude of service partnership
Everyone has made a failed run into a partnership with the ‘They-have-what-I-need’ mindset. Brad Feld has a great short post [suggested by Itamar Goldminz] where he talks about his experiences with start-ups attempting partnerships with big companies, which so often ended in failure.
He eventually learned that this was a failure of mindset, and easily fixable:
I decided I was thinking about it completely wrong. I came to these conversations wondering what the big company could do. Sure, I considered the skills and capabilities of the startup, but I was always trying to figure out and anticipate how the big company could help the startup.
Wrong, wrong, wrong, wrong, wrong.
If you assume the big company has no fundamental obligations to a startup, you can’t get hurt too badly.
This realization was a turning point for his approach to partnerships. What it really comes down to (though Feld never states it explicitly) is understanding and empathy.
It’s crucial to realize that partners are stakeholders in the partnership, not in your company. They will be (and should be) focused on their own agenda, and completely indifferent to your agenda.
I realized that was a consistent pattern in my world. Large companies have whatever agenda they have. They have no responsibility to the small company beyond whatever legal contract exists, which often is heavily weighted in favor of the large company. Strategies change. Executives change. The macro changes. Exogenous forces, that the small company can do absolutely nothing about, regularly cause havoc for the large company.
Instead of expecting something from the big company, you should be focusing on doing specific things that help the big company while advancing your goal as a small company.
Never expect special treatment. Don’t expect them to go out of their way for you. Have enough empathy for their situation to appreciate that there are forces at work that you may never know about, that affect your partnership.
This is the core reason that partnerships can be so risky — you’re not in control (and sometimes not even informed) of all of the variables that can affect the longevity and quality of the partnership.
If you only read one thing — read this
Ray Stern is a veteran of big business partnerships and strategy. As a Senior Vice President at both Yahoo! and Intuit, creating and managing partnerships was a big part of his background. When he recommends a resource, you read it. Probably a couple times.
He suggested Simple Rules for Making Alliances Work, from the Harvard Business Review. This article is full of high-level wisdom and some very tactical advice, so no matter what business or type of partnership you’re considering, there will be something valuable in it for you.
The parts that seems most interesting (and counterintuitive) to me were about 1) the importance of openly discussing differences of culture — actually airing gripes about process and performance:
A turning point came when some alliance executives began systematically documenting differences between the companies and then held working sessions with team members to discuss how those differences were being perceived and whether they might benefit the alliance if they weren’t ignored or suppressed. Because many of the differences touched on sensitive issues concerning competencies and culture, people were initially reluctant to address them, preferring to focus on imagined or desired commonality. When the teams finally overcame their reluctance, frustration that had built up over many months came pouring out, and perceptions of each other were often expressed in negative or even inflammatory language.
Over time, though, the partners were better able to view each other’s qualities in a positive light.
and 2) how important it is to take an extremely broad view of who the stakeholders are and will be in the partnership, and have the foresight to include them in the plans from the beginning:
Though eminently reasonable, the conventional advice — to serve the partnership at all costs — is insufficient. Equally important, and often more difficult, is maintaining commitment from and alignment among the business units and functions (finance, legal, R&D, sales) in your own company that are affected by the alliance or on whose contributions its success depends.
Companies are not monolithic, yet alliance advice tends to gloss over this basic reality and treat partners as if they were simple, homogeneous entities. Although most counsel on alliances highlights the fundamental importance of trust, it rarely delves into what our research and experience indicate are the biggest barriers to trust: mixed messages, broken commitments, and unpredictable, inconsistent behavior from different segments of a partner organization.
More Wisdom on Partnerships from Ray Stern
Through a lifetime of building partnerships at companies of all sizes, Ray has developed a sound Partnership Philosophy that he’s been willing to share with us.
This one slide is the blueprint to crafting any kind of partnership, from small business up through the Fortune 500. Each word is carefully chosen and none of these points can afford to be skipped.
Directly from the desk of Ray Stern
Any time you find yourself approaching a potential partnership, or evaluating one — return to this set of fundamentals to ensure that your strategic alliance will have a sound foundation, and a chance for success.
Strategic Decisions about Partnerships
One of the tough things about these kind of partnerships is that decisions constantly have to be made, re-considered, and re-made again. It’s in their nature to have moving pieces, and be affected by a huge number of variables (known and unknown) that continually affect changes to the circumstances of the partnership.
It’s helpful to have some guiding ideas on how to think about these alliances, and what strategies you can approach them with.
When to seek an Alliance
The most basic choice to make here isn’t who to ally with — it’s when. The stage you’re at will determine the kind of partners who will make good fits. As a company looking to create a new capacity (in some way — a product, offering, service, etc) your three options are: Build, Buy, or Ally.
We can see the basic decision inputs here, thanks to a slide taken from this presentation by Cisco, suggested by Itamar Goldminz.
The Switchback Strategy
Partnership isn’t a marriage. It doesn’t have to be a more perfect union, ‘til death do you part. Alliances exist only as long as strategic value exists and goals are aligned. Many companies are now partners who competed in the past — and many companies who partnered together are competitors today.
This is a strategy that has been studied by researchers at Wharton, dubbed the Switchback Strategy, where companies temporarily either cooperate or compete with companies that it expects and hopes to have the opposite relationship with in the future.
Here is the full academic paper about Strategic Switchbacks, and a much more user-friendly article that sums up the information nicely. Thanks to Karan Khandpur for suggesting these!
Here is an interesting excerpt on the temporary cooperation strategy:
Start-ups that want to sell directly to their customers but do not have the supporting infrastructure such as marketing and distribution can adopt the temporary cooperation switchback strategy. […] In the partnership, the start-up learns from the corporation how to market its product. Eventually, the goal is to break free and go directly to customers.
However, start-ups have to be smart in the way they execute a temporary cooperation switchback strategy. It is important to ensure that the agreement with the partner is structured in a way that the start-up can learn from the experience.
And the temporary competition strategy:
Start-ups that are having a tough time finding a bigger partner to license their technology or through whom they could sell their products might wish to consider going to market themselves — at first. This is what Hsu and Marx call the temporary competition switchback: Compete in the market to prove the worth and usefulness of the product or technology as a way to get a future licensing deal or strategic alliance.
This strategy would work for start-ups facing skepticism from potential partners, which arise because the most valuable applications for the technology are not clear, could not be measured or because an industry standard has not yet emerged.
The Perfect Case Study: Disney & Pixar
One of the most popular cases from Harvard Business School on the topic of Partnerships explores the strategic relationship between Disney & Pixar. You’ll learn a lot from this short read about how their partnership developed, and the tough decisions that needed to be made as it evolved.
They’ve had a fascinating relationship — working together closely at times, negotiating hard, and learning huge amounts from each other through their cooperation. Here’s a great example of the attitude that Steve Jobs (then at Pixar) brought to the thinking about this partnership:
This three-picture deal resulted in the 1995 hit film Toy Story, directed by Lasseter, which garnered more than $350 million in box office and video sales, making it the highest-grossing film released in the United States that year. Yet from 1995-1998, Pixar earned only $56 million in revenue. When asked if he had regrets about inking the deal, Jobs said, “None, no. we’re working with the best in the business and we’re learning a lot. We call it going to Disney University.”
You may notice some similar elements to the ‘temporary cooperation’ strategy we just saw in the study from Wharton. As Pixar was a young company, it relied almost entirely on Disney’s promotion and distribution engine to spread the brilliant productions that Pixar knew it could create.
Reading about the development of their partnership and the strategic moves from the perspective of the decision-makers is fascinating, and it’s also super cool to read about the logistics behind the production of some of your favorite movies. Highly recommend the Disney & Pixar Case Study.
A Little Bonus Reading
Lots of good resources submitted this week, and not everything found a home in the topics we looked at, so check out some of these strays — some real gems in here!
How Coursera Cracked the Chinese Market — Not a lot of meat in this article, but it’s a fascinating thing to hear about. I’d love to learn more about this process — it’s a testament to the power of alliances. Thanks to Bruno Raymond for the suggestion!
Business Partnership Best Practices: Creating and Cultivating Valuable Alliances — A lot of wisdom in this relatively short article. Loved their answers for working non-monetary terms, and handling failures of delivery during partnership execution. Thanks again to Ray Stern for the suggestion!
Open Questions
Where to start… seems like an overwhelming amount still to learn about these alliances. I like to end these collections with questions that lead to interesting branches of research, and welcome answers or new resources — so comment if something comes to mind!
More case studies of wildly successful (or catastrophic) alliances
What are the most common types of partnerships? Distribution? Advertising? Manufacturing?
How can a company estimate the opportunity cost/reward trade-off of pursuing a risky partnership?
When does a partner become a customer or a client? What’s defines the scope of ‘partnership’?