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  • 1. Alfred Griffioen If you have any comments, additions or internet links thatCreating Profit Through Alliances might be useful to others, please email these toHow collaborative business models can contribute to competitive advantage alfred.griffioen@ allianceexperts.com. Every few weeks new comments will beFebruary 2011 incorporated as sticky notes in the PDF document.
  • 2. This PDF document is designedfor printing on A4 paper. Onecan choose to cut of 8,7 cm onthis side to have the book in a21 x 21 cm format, or to keepthis broad margin with extracomments and links.
  • 3. Alfred GriffioenCreating Profit Through AlliancesHow collaborative business models cancontribute to competitive advantage
  • 4. Creating profit through alliancesThe PDF version of this book can be downloaded forfree on www.allianceexperts.com/creatingprofitBe a co-creator of this book! Comments, links andsuggestions for case studies can be sent toalfred.griffioen@allianceexperts.com.© 2011 Alliance experts. Although the book can bedownloaded on our website, this copyright includesthe prohibition of any further publication of the bookor parts of it on the internet or in closed user groups.However, you are invited to quote up to 250 words orto use one figure in your own publications under thecondition that you mention the author, title andsource (Alfred Griffioen, Creating Profit ThroughAlliances, www.allianceexperts.com/creatingprofit).ISBN 978-90-816811-1-7
  • 5. ForewordStrategic alliances can be a great source of Goods industry is entirely different from lifecycles incompetitive advantage. However, this only works if the electronics industry. How to split investments and Contact details:each partner has a clear understanding of its market, revenue in such a case? And which partner capturesand the market for the joint proposition offered by the extra brand value and is awarded the intellectual http://sg.linkedin.com/pub/the alliance, and if the two can devise a business property rights? ivo-rutten/1/a7/4b0model that benefits not only themselves but also thecustomer. Numerous alliances exist, and a variety of www.philips.com collaborative business models is called for. The pointOver the last several years I have been involved in is that few have been described. Therefore I welcomesetting up a large number of alliances that helped the authors initiative with this book. I hope and trustPhilips advance in technology, in efficiency, or in the that it will help companies embark on partnershipsway we meet our customers‟ needs. We sought much better prepared. In that way we may all enjoypartners outside our industry and created entirely new and innovative products and services, that wouldnew types of propositions, ones we could not have not see the light of day without collaboration, yetcreated just by ourselves. This has helped to create seem so obvious once they do.entry barriers for competitors: aside from meetingthe technology challenge, they would have to findtheir own fitting partners, and then together withthem agree to realise a new proposition….and then itstill needs to be jointly brought to market!Working with partners from different industries places Ivo Ruttenextra demands on an alliances business model. For Vice President Corporate Strategy and Alliancesinstance, the pace within the Fast Moving Consumer Royal Philips Electronics 3
  • 6. ContentsIntroduction 51. Competitive strategy reviewed 7 Differentiation leads to profit 8 Decide where to differentiate in the value network 10 Decide how to differentiate: generic strategies and their current validity 152. Alliances as strategy accelerator 24 What competences do you have? – and need? 24 Alliances versus other sourcing methods 27 The process of forging an alliance 29 Ten forms of alliances 343. Creation of value 36 Increasing relevance for your customer 36 Developing a unique product 44 Creating cost advantages 49 From normal value to top value 52 Value of participating in a network 594. Distribution of value 63 General 63 Distribution agreement 66 Franchising 70 Aligning propositions and referral 71 Collaborative offering 73 Co-branding 75 Joint R&D 76 Technology licensing 79 Shared investment 80 Reciprocal hiring agreement 81 Unusual supplier risk 825. The formal agreement 83 Process 83 Contract or joint venture 84 Intellectual property 89 Four complicating factors 90 Termination of the alliance 95Conclusions 97Acknowledgements 98Literature 994
  • 7. IntroductionWhy are some companies more successful than In this book I wish to guide you from the theoreticalothers and how can alliances contribute to this background of the creation of value to the moresuccess? I have spent the past few years researching practical considerations of forging an alliance,these questions, in search of practical answers. Its including the distribution of the newly created value.quite easy to perform analyses and to devise This book is written for those that are involved indescriptive structures; but what guidelines and forging and managing alliances, varying from boarddirectives can be extracted from scientific research members and strategists to business developmentand the operational experience of companies and alliance managers. The overall structure of theworldwide? chapters and paragraphs is shown in Figure 1.Chesbrough1 has formulated a definition of a Chapter 1 starts with the principles of creating valuebusiness model that is extremely useful to keep in for your company. The key to above average profits ismind when assessing the possibility of an alliance. differentiation. The concept of the value network – in contrast to the value chain – may help you decide where you want to differentiate yourself from the Business models create value* competition. Porter and Treacy & Wiersema are and capture a portion of that value significant contributors to strategies on how to * by defining a series of activities from raw differentiate. However, the availability of information materials to the final consumer and capital has increased tremendously over the last decade, and some of their assumptions no longer Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Competitive Alliances as Creation Distribution The formal strategy reviewed strategy accelerator of value of value agreement Which competences Additional Distribution agreement Differentiation value drivers do you have? Franchising Contract or leads to profit - and need? Proposition alignment Joint Venture Collaborative offering Decide where to Customer relevance Alliances versus Co-branding Intellectual differentiate in other sourcing property the value network Joint R&D methods Unique product Technology licensing Four complicating Decide how to The process of Shared investment factors differentiate: Cost advantages generic strategies forging an alliance Reciprocal hiring agreement Terminating the and their current Unusual supplier risk Ten types of alliance validity Participating alliances in a network Figure 1. Overall structure of the book 5
  • 8. hold. I therefore introduce three adjusted strategies that is, a joint venture. A practical arrangement forfor differentiation: creating customer relevance, intellectual property rights is suggested andhaving a unique product and – for the short term – complicating factors are discussed, such as aachieving cost advantages. partnership between two companies significantly different in size. And, finally, termination clausesChapter 2 introduces the concept of alliances from a should not be omitted.resource perspective. What competences do you needto successfully execute your strategy? Alliances are In my research I found that there is hardly any casecompared to other sourcing methods, and the process material available about the way alliances areof forging an alliance is described step by step. With structured financially. It therefore gives me greatreference to the definition of a partnership, ten types pleasure to include cases of 14 different companiesof alliances are presented. that were open and kind enough to disclose their working methods. In addition to these companies, IChapter 3 elaborates the three strategies for had off-the-record interviews with alliance managersdifferentiation introduced in Chapter 1. Exploring how of Oracle, Ebay, Cisco, Alcatel-Lucent and Thales.the ten types of alliances contribute to thesestrategies, the focus is on the added value of an I regard this book as a working document. It willalliance compared to direct investment. Two further therefore be available as a PDF document and ebook,aspects are described: additional value drivers such as with only a limited edition in print. It is likely that amarket dominance and recurrent turnover, and the new edition will be published in 2012, and I wouldvalue of participating in a network. therefore welcome further input in the form of new models and cases.Chapter 4 delves deeper into the financial structure ofeach type of alliance. Ways of splitting revenue and The downloadable version of the book will have acosts and of allocating intellectual property rights are broad margin for „virtual‟ sticky notes. These can offerdetailed for various situations. You can read this as a brief examples, suggestions for further reading, linkssort of cookbook for your own situation, and I suggest to Internet sites or even corrections. All readers areyou treat it accordingly: if you do not need a dessert, invited to share their knowledge. This way the bookjust skip the corresponding recipes. can also serve as a discussion document.Finally, Chapter 5 addresses some of the legal aspects Alfred Griffioenof forging an alliance. Most types of alliances can be January 2011arranged through a contract or a new legal entity, If you have any comments or additions, please email these to alfred.griffioen@ allianceexperts.com and I will post them as sticky notes in the document within a few weeks.6
  • 9. 1. Competitive strategy reviewed focus more on making a profit, non-profit organisations are more likely to look at how to serve their customers or society better or cheaper, and dedicate extra resources to that. A study2 among 168 businesses shows what the most important factors are in order to be successful in a market. On the one hand, it is having the right resources, such as highly skilled people, protected knowledge, brand awareness or long-term contracts. On the other, it is having a highly distinctive strategy. These factors depend on each other: your knowledge and resources will largely determine your strategy. It turns out that your strategy is the most important factor for success in the market, followed by your resources and to a lesser extent the competition intensity. Your financial results are affected to similar extent byHow do you achieve growth, and how do you make a this success in the market and the power of yourprofit? That really is the question that is answered by suppliers. After all, if they take care of a major part ofyour business model: a description of what you as a your product or service, they can also claim part ofbusiness do, who your target is and how you earn your results. A useful structure to describe allyour money. The term became very popular during aspects of a business model is madethe late nineties, as every Internet start-up required a This chapter elaborates on the relationship between strategy and profits. Key element in this is by Alexander Osterwalder. You canbusiness model. This does not exactly define what a download the first part of his book on:business model is, but it does give some indication. differentiation from your competitors. The concept ofSo if you are asked "what is your business model?", the value network is introduced to be able to think of opportunities that are new to the market. Generic http://www.businessmodelgeneration.you could for instance say: Ive got a printing com/downloads/businessmodelgeneracompany that produces advertising copy with very strategies by Porter and Treacy & Wiersema are reviewed to see how you can differentiate yourself in tion_preview.pdfshort delivery times. a sustainable way.The important thing is to think about the added valueof your business. Added value can be converted intoprofit, growth, security for your staff or extra benefitsfor your customers. Whereas businesses will perhaps 7
  • 10. Differentiation leads to profit It is easy to perform worse than the average in your branch of industry, and a number of well-managed Every branch of industry has its own characteristics businesses will certainly earn more than that and, depending on supply and demand, their prices average. However, it will be difficult to earn are higher or lower. If you are looking to buy a new significantly more than the average if you cannot setA great book about differentiation car, you will have plenty of choice and the margins of yourself apart from the competitors. As soon asis “The Purple Cow” of Seth Godin. the dealer and supplier are small. If you are looking elements of your clientele, suppliers, method, etc.An impression and some bonus become known, at least one of your competitors willchapters are available on for someone to repair your central-heating boiler in the middle of winter, supply is limited and prices are follow your example. This competition will againhttp://www.sethgodin.com/purple/ reduce your advantage.index.htm correspondingly high. There are a number of characteristics that lead to Southwest was the first airline company in the United more power for the demanding or for the supplying States to introduce the low-cost principle: no coffee party. Those characteristics are shown in Table 1. A or meals during the flight, having to check in again balance between supply and demand leads to a for the next flight and no frequent flyer bonus market price. Balance between supply and demand schemes. In addition, everything was organised in (because often there will be only one dealer per car such a way that the aircraft turnaround time could be brand in a city, and only a handful of installers per kept to a minimum. This enabled them to keep ticket region) allows everyone to make a reasonable living. prices extremely low, and Southwest was very If there are too many suppliers, turnover drops and successful in doing so. In Europe, Easyjet and Ryanair someone will have to close his business. If the are the biggest followers. number of suppliers is too low, it wont be long before someone tries his luck and opens a new These days, every established airline company offers business. If you are unlucky, you also have a cost short flights at low prices and they often have a disadvantage, such as standard shops in excessively subsidiary operating according to the same principle: expensive locations, or consultancy agencies with Singapore Airlines has Tiger Airways, Iberia has overpaid staff. In other words, with a standard Clickair. This means that competition has become product your profits will always remain limited. fierce in this market segment too. More power to the supplier of products or services More power to the buyer of products or services  The number of suppliers is limited, so there is  The number of buyers is limited, every buyer little competition represents a lot of turnover  There are many differences between suppliers, it  Where he buys his products is irrelevant to the is difficult to make a comparison buyer, product variations are small  To suppliers it is an unimportant product, they do  Suppliers are highly dependent on this product not depend on it and do not have to sell at loss and cannot afford to miss a sales opportunity  There are no substitutes  There are plenty of alternatives  It is difficult for the buyer to abandon or  It is difficult for the supplier to keep the products postpone his need in stock any longer and sell them later on. Table 1. Factors that determine where the power lies between supplier and buyer 8
  • 11. It is not as if certain branches of industry yield more such as lighters and cotton wool, and servicesreturn than others. This is on account of the investors. provided by hairdressers, smaller restaurants andAfter all, virtually every business needs capital: for cleaning companies.machines, for researchor for day-to-day monopoly with price in competition price monopolyoperational price skimming the marketmanagement. Asidefrom banks and the demand curve demand curve demand curveentrepreneurs directly,it is professional price of the profit profit competitor profitinvestors and - in the costs costs costscase of listed businesses- large groups of private numbers sold numbers sold numbers soldinvestors whostrengthen that capital. As soon as a branch of Figure 2. The effect of the demand curve with competition and in aindustry appears to yield a more favourable return on monopolythe invested capital in the long term, more investorswill plough their money into this. This supply of If you are selling a unique product, or if you know ofcapital will cause that branch of industry to grow, as another way to ensure customers choose you insteada result of which prices, and with that the profit of your competitor, you will have a kind of monopoly.margins, will fall. In that case, you are free to determine at which price you wish to sell your product. That price comes with aA possible answer to the question on how to derive certain demand, which is how you can optimise yourprofit is offered by elementary microeconomic profits (second diagram). If you start off with a highertheory. This concerns the demand curve for a product price and then slowly bring it down, you can make anor service. If the price is high, the quantities sold will even bigger profit. This is known as skimming thebe small, and if the price is low, more products or market (third diagram). Apple sold the first iPhone forservices will be sold. This relationship is called the approximately 300 dollars, and then graduatelydemand curve. lowered the price.In a situation with competitors where everyone sells So it is vital to distinguish yourself from themore or less the same product, you have to go along competition, in other words, to create a smallwith the others. Because if your prices are higher monopoly. This principle is described by W. Chan Kimthan those of your competitor, everyone will go to and Renée Mauborgne in their book Blue Oceanhim, and if your prices are lower you will deprive Strategy3. Instead of competing on existing markets,yourself and the competitor may also lower his the so-termed red oceans where sharks fight eachprices. The price multiplied by the numbers sold is other for every morsel of food, you should findyour turnover, and if you deduct your costs from that yourself a piece of blue ocean without competitors,you are left with a (small) profit, as demonstrated in and build up your business there. They propose athe first diagram of Figure 2. This typically applies to practical method whereby - assuming an existingraw materials such as pig iron and diesel, objects product or service - you can look at which aspects you 9
  • 12. may leave out, reduce, enhance or create. The Decide where to differentiate in the objective is to develop a completely new market area without competitors. value network There are many search engines such as Google, but it has achieved a level of name recognition everyone else can only dream of. Thanks to that name recognition, Google draws lots of visitors, and so a lot of advertising revenue, and so a lot of opportunities to develop new services and, with that, new business models. Who might be able to knock Google off its throne? Theres Ixquick, a search engine that was the first to be awarded the European Privacy Seal, which deletes search data after two days. Ixquick offers privacy that you cannot (or no longer) get from Google, and that is what makes it stand out. However, Wikipedia too could develop into a search system based on a completely different business model, with volunteers keeping th e knowledge up-to-date, while it yields more relevant results because of manual selection. In short: successful businesses create new supply inwww.ixquick.com those product groups or markets where they are the In order to work up to a specific distinction, you need only ones. They bring their business model in line an insight into the activities before and after you. This with customer needs not yet fulfilled by others. This knowledge will help to identify unserved needs in is how they develop a small monopoly, enabling the market, which offer the potential for profitable them to set the prices themselves and to maximise business. The value chain or, as we will see, the their profits accordingly. value network will help you with that. In addition, you need to know what you are really good at. The value chain is the succession of activities needed to supply a product or service to the ultimate consumer. To that end, the terms product column or business column are used. A generic value chain for a product is shown in Figure 3. 10
  • 13. would be presented asRaw material Wholesale part of a marketing Manufacturer Retail trade End user supplier trade framework that is trusted by the public.Figure 3. Generic value chain for a product Active promotion by family doctors would also help, as they often see hayThe value chain in its original setup is a highly fever patients about their complaints.simplified representation of reality. The concept isconvenient if you want a quick overview of a Only in some cases is having customer contact trulybusiness within its sector, but the value chain is not financially appreciated. If someone clicks on anusable for gaining an insight into new business advert next to the Google search results foropportunities. To that end, the concept must be mortgages or insurance, Google charges theaugmented with the four insights outlined below. advertiser multiple dollars. In the electricity and gas supply securing a new customer can cost up to 100 dollars and these costs are activated on the balance1. The value chain consists of more than goods sheet and depreciated over three years.and moneyThe concept seems simple: goods and services move 2. Primary and support activities in the chainthrough the chain from raw materials producer up to influence each otherthe consumer, in return for money. However, theeconomic truth is much more complex. Banks furnish If you work out the details of the value chain further,money for money, and insurers cover risks. you will distinguish different activities within one linkKnowledge streams also form an important part of (often one business). These activities influence eachthe economy in the form of patents, copyrights and other:databases. Experiences, ease and reputation addvalue as well. Finally, there are a lot of intangible  The decision of the purchasing department toassets such as goodwill, reputation, customer loyalty work with a far-away or nearby supplier directlyand community formation that are vital to a business, affects the logistics process.but are not made manifest in the traditional chain4.  The decision of the marketing department to focus on far-away or nearby customers willRelevance to your customer is one of the most affect shipment or delivery and the service.underestimated assets a business can have. Imagine  The personnel policy and investments inyou have developed a magnificent new pollen filter buildings and ICT networks of the businessthat can stand on your bedside table and do its job influence productivity.without making any noise. A lot of hay fever patients  Product development influences almost allcould benefit from this. However, if you were to offer activities.this under your own name, it takes a very long timefor the product to break through. Were the product tobe produced and distributed by Philips Healthcare, it 11
  • 14. In addition, decisions within the link may affect product that a lot of consumers buy in the shop andactivities in other links: take home with them straight away. The microwave must be transported, taken out of its packaging,  The decision to use semi-finished products inspected, installed and tested, the user manual must instead of raw products leads to a shift in be read and the packaging must be disposed of. activities and perhaps also a choice of other suppliers. This may be more efficient for the All these activities harbour opportunities to add entire chain if the new supplier has a better value, without it costing substantial amounts of extra process for this than the company itself, or if the money. A delivery service is an obvious idea. A transport costs are drastically reduced as a result smaller box or a different type of packaging would of that. make it easier to carry and reduce waste. Three IKEA-  The way in which the product is packed directly type pictures on the box could immediately simplify affects the logistics process in the next link. the installation process. A well-designed operating  Introducing additional quality control to the display could render a user manual virtually operations could lead to extra costs in the own superfluous. And as soon as a seller of microwaves link, but will lead to large savings in subsequent starts promoting a certain model because he never links due to a lower amount of rejected receives any complaints about it, the price of that products. product could be increased by ten dollars.So links in the value chain and activities outside of it Another underestimated element of the value chaincannot be treated separately. Only when you look at at the consumer (but also at a companys purchasingthings more closely will you be able to see hidden department) is the effort made to come to ancosts and find a solution to that. In some countries, informed choice. This begins with focusing onfor example, electronics supplier Samsung outsources potential suppliers, finding information on themaintenance on printers to Microfix. This required a product, and taking a decision that can also belot of coordination between the department at explained to the partner or manager. The processSamsung with customer contact and the schedule of continues up to placing the order and making theMicrofix engineers. That is why it was decided to payment. A customer may perhaps spend more timeoutsource the entire process of making an making his purchase than you do in the sales process.appointment with the customer to Microfix,integrating customer contact and scheduling. This led Adding value is possible in this part of the processto efficiency on both sides. too. By being findable, having transparent sales material, offering tailor-made suggestions, collecting positive references and simplifying the ordering3. The value chain doesn’t end with delivery process, you can make it so much easier for the customer. A good example of this still is theThe value chain does not end with the delivery of the amazon.com website, which gives you personalisedproduct or service to the consumer. Various activities tips each time you log in and which allows you totake place at the consumer as well, and this is where browse books.a lot of opportunities to create added value can becreated. Lets take the sale of a microwave. This is a12
  • 15. 4. The value chain diverges and converges Supplier Consumer Supplier ClientThe value chain is not straight. Each product is made Consumerof components, and in order to run a business youneed various investments and services. Apart from Supplier Company Client Consumerstaff, a hairdresser also needs premises, chairs, washbasins, trimmers and hair care products. The services Supplier Client Consumerof the interior designer and the coffee machine alsocontribute to the value added by the hair dresser. Figure 4. A possible value network around a businessNaturally, a purchasers attention is mainly drawn to The next step is to quantify the identified streams.the largest expense items. For a steel plant, they will What percentage of your turnover can be found inbe the iron ore and coals. So you can be sure that the each buyer group and what percentage of purchasingnegotiations on the delivery contracts in this respect do your buyers spend? What are the most importantwill be fierce. But what about security services? The end products that your activities contribute to andsteel plant may not be interested in this, but the how important is your share in this? Are there anysecurity company is. costs up the chain that you can easily prevent?Not only does the value chain operate as a funnel, it Packaging costs are a good example of costs that canalso branches out. First, because a plant can often be reduced. A semi-finished product ismanufacture different products for different buyer packaged in a certain way because that is standard ingroups. But residual streams also have their value or the industry. This often is packaging that is cut openprice. Energy companies supply CO2 to market and thrown away. Why is that packaging notgardeners who use it to improve crop growth. By returned? At one point, the cable and plastic pipesseparating waste, some residual streams can be trade replaced the wooden reels with removablerecycled and processed or even sold at a lower price. steel reels. This substantially reduced the freight volume for the collection of reels.Use these four insights to look at your businessactivities in a wider context. We are no longer talking If you take the network of business activities thatabout the value chain, but your place in the value yields a certain product or service, you can - using thenetwork. right data - also reconstruct where the biggest profits on this product are made. This will of course notThe value network is in effect the diagram of the always be completely successful, but if you collectcomplexity within which a business and its activities information methodically, you will arrive at a certainoperate. You can start by drawing the value network insight as shown in Figure 5.around your business by looking at the mostimportant suppliers and buyer groups (see Figure 4).Who else supplies your buyers, and do your buyerssell on your product unmodified, in combination withother products or processed in another product? 13
  • 16. System Weekly reports Storage/archiving Performance Supplier Supplier Accounting €5 Interface with bank overviews Management € 15 software €2 € 60 € 100 Creditors Supplier Company Client Consumer Accountant Audit Financial positions Security Turnover per Purchasing audit administration € 23 Purchasing € 30 Purchasing € 75 supplier Own costs € 22 Own costs € 20 Supplier Profit € 5 Profit € 8 Reporting Overviews Turnover per customer Marketing Purchasing € 3 software Analysis tools Turnover per product Own costs € 10 Profit € 10 Alarms Figure 5. Analysis of where the profits in a value network can be Figure 6. Qualitative contributions in a value network found The objective of drawing a value network is to gain Drawing the value network also helps you to visualise insight. This insight should lead to recognising the smaller contributions to an end product. Not every opportunity to structure a chain differently. It is by business provides a product that the consumer can taking advantage of those opportunities that you can recognise. Accounting software for instance is add value as a business. The supplier of accounting untraceable, but the role of accounting software in a software may, for instance, also develop integrated generic process such as financial administration can reports if it emerges that these are important for the be visualised, including contributions from other buyers of the financial administration. suppliers and the results for the different departments and stakeholders (Figure 6). Eastcom SystemsContact details: Eastcom Systems is a Singaporean company Management, targeting large companies like Fedex,http://sg.linkedin.com/in/peterhum established in 1992, as a vendor providing Citibank and Standard Chartered Bank. Such productivity solutions to help customers manage their companies generally have no overview of how muchhttp://www.eastcom-systems.com/ telecom expenditures. One of their main products money is wasted or overspent on telecom costs. was a call accounting solution to help companies to Eastcoms business model is to help these companies analyse their PABX telecom costs, e.g. by breaking manage and reduce their telecom costs. For large down the call charges in terms of departments and global companies, telecom costs can reach as high as employees and types of calls (internal, long-distance, 1 or 2% of their turnover. etcetera). In 2007 the management decided that selling licenses only was not the way to stabilise Eastcom Systems can supply its software products as revenue, which was declining due to competing licensed solutions or through a comprehensive services „through the Internet cloud‟. service for companies wanting to outsource this part of their cost management. The core of the product is The company therefore chose to offer cost a business intelligence system with data mining management services such as Telecom Expense 14
  • 17. functionalities. The revenue consists of licensing fees, We are looking for partners that are willing to investmonthly service fees or a percentage of the savings. in a long-term relationship with the CFO or any senior level managers who focus on operational P&L.Business development manager Peter Hum explains: Partners should see that we can help them set“As Telecom Expense Management is a niche market themselves apart.”and is designed for regional and globally focusedenterprises, we have to look beyond the borders of One of Eastcom‟s most important partners is inSingapore. We call ourselves a global company, and Malaysia. The partnership is formalised with an NDAhave arranged our presence in other countries and a partnership agreement. The partner does thethrough partners. Our overall strategy can be sales and system integration, Eastcom provides thecharacterised as customer intimacy, so we have to sales support, cost management technology, costwork closely with these partners to deliver a management domain knowledge, and technicalcustomised product to our clients. support. Revenue is shared, with the partner receiving a percentage of the contract value forThe value of the partnership for us lies in the Eastcom. There is a model for intercompany pricepartners network. We can add specific knowledge setting, in which every partner has to defend itsand our products. We have some protected markup.intellectual property and our business intelligencesystem is a result of many man-years of R&D and Eastcom maintains a partnership in Belgium as well,software developmental efforts.” with a company called Convergent Strategies. Peter Hum: “We are very closely aligned with ConvergentFinding the right partners is always difficult. Peter: Strategies, and the collaboration turned out to be“We see a lot of companies with a background in IT, useful for European companies with branches in Asiabut in most cases they have access to the potential or Asian companies with branches in Europe. Thiscustomers IT manager, and not the financial director. adds another dimension to our offering.”Decide how to differentiate: generic However, as accessibility to information and capital has increased strongly over the past 10 to 15 years,strategies and their current validity these strategies have lost part of their basis. In this section I will discuss which elements continue to offerIf you know where your opportunities in the market permanent competitive advantage.lie and what your strengths are, you have to dosomething in order to further differentiate yourself. Ifyou continue doing what you have always done, youwill get what you have always received (such as poor Generic strategiesprofits). Porter and Treacy & Wiersema are the most importantIn order to differentiate, various generic strategies authors that explain how you can flesh out yourwere developed during the previous century. distinctiveness in relation to the competition. In 15
  • 18. addition, one of the most important models used indifferent to which strategy you should choose. Their portfolio matrix of the Boston Consultancy Group. only guideline is that any choice has to be made with dedication. Pursuing two or three strategies at the The Porter and Treacy & Wiersma concepts (see the same time will result in „middle of the road‟ boxed text) both provide three strategies and are offerings. Porter Competitive Strategy Porter plots this in a spectrum, with the width of theAn excellent article database on customer focus on the vertical axis, and the choicestrategy is www.themanager.org. Porter5 indicates that there are three successful between low costs and product differentiation on theOn this site you can find an generic strategies for achieving an above-average horizontal axis (Figure 7). He argues that if a businessarticle of Dagmar Recklies with profit: fails to make a clear choice between one of the threethe title “Beyond Porter – A options, it will be stuck in the middle. That makescritique of the critique of Porter”.  Supplying a (standard) product at the lowest sense, because if no choice has been made for a longSee http://www.themanager.org/ cost, in order to achieve the highest margin in while, implementing the options will take a lot ofstrategy/BeyondPorter.htm relation to the market price. Porter calls this cost effort. To give a few examples: Ryanair pursues cost leadership. leadership, Rolex pursues product differentiation, and  Supplying a product that deviates from the with the CL75 Poppy cell phone, BenQ Mobile aims at standard: this renders a direct price comparison the trendy female, a typical focus strategy. impossible. Porter calls this the product differentiation strategy.  Supplying a clearly delineated group of Treacy & Wiersema’s Discipline of market leaders customers: the focus strategy. This enables you to meet the specific wishes of the customer In 1995, Michael Treacy and Fred Wiersema published group and to align your products and delivery the book "The discipline of market leaders" 6, subtitled accordingly. "Choose your customers, narrow your focus, dominate your market". The key message in their book is to Lowest costs Differentiation choose a clear direction for your business, and to subsequently have the discipline to concentrate on Broad focus just that direction. Product Cost differen- leadership Treacy & Wiersema, too, recognised three generic tiation directions for a business to be successful, which are to some extent comparable to those of Porter: „Stuck in the middle‟  Operational excellence: supplying a product at the best possible total costs, also taking into Focus strategy account the efforts to be made by a customer. Narrow focus The latter is the addition compared to cost leadership. McDonalds is a good example: Figure 7. Porters generic strategies for competitive advantage certainly not the cheapest supplier of 16
  • 19. hamburgers, but its formula offers short waiting Treacy & Wiersema indicate that each of the three times and, above all, a guarantee concerning aspects should be present at a minimum level, but the products quality. This saves the customer that you should differentiate with respect to one time in searching and trying out. By aspect only (see Figure 8). For instance, a consultancy standardising the business processes and even agency may decide to focus on a select customer the premises, McDonalds keeps its own costs group and offer it a tailor-made range of services down. (focus on customer intimacy). Nevertheless, it is still  Product leadership: supplying the best product. important to execute jobs efficiently and at This is not the same as product differentiation. reasonable rates (operational excellence) and to There is a host of suppliers of sports shoes, and introduce new knowledge or concepts on a regular their products differ to quite an extent. Only a basis (product leadership). company such as Nike manages to stay one step Product ahead with new innovations, such as the Nike Leadership Air, a new type of fastener or its collaboration with Apple.  Customer intimacy: adjusting your business operations around a certain customer group, and supplying it with all required products. This Minimum is similar to Porters focus strategy. An level important aspect in this respect is good customer relationship management and being able to adjust your products and services to their wishes. This strategy demands decentralisation of competencies in dealing with Operational Customer customers. Excellence Intimacy Figure 8. Three strategies according to Treacy & WiersemaA relatively limited study 7 among the 25 most Whereas Porter and Treacy & Wiersema provide tipsimportant American Internet companies provides us for individual business activities, the Bostonwith an initial picture of the success of each of the Consultancy Group matrix is particularly popular whenTreacy & Wiersema strategies. Among other things, making choices within a portfolio of activities. Thethe study looked at turnover development in the underlying assumption of this matrix is that havingyears 2005 and 2006. The group of companies with a several activities within a single company is a meanscustomer intimacy strategy and a product leadership to secure a more stable flow of income and that youstrategy both experienced an average annual growth can move money from one activity to the other.of 20%, while the companies with an operationalexcellence strategy experienced an annual growth of If a product is relatively new, the market for thatapproximately 8%. product will still have to grow, while the increase in production and distribution demands a lot of money. 17
  • 20. Once a product has reached the maturity phase, the Due to the increasing availability of information, it ismarket will stabilise or shrink with it, and money also easier for smaller innovative businesses to offerbecomes available. In addition, the thought behind their services and to start competing with the largethe BCG matrix is the belief that if you are market established players. This promotes continued productleader, you can make more profit because you can rationalisation. By a simpler spread of technology, theachieve benefits of scale. number of competitors for a product grows quickly and prices drop. A good example of this is given inThe strength of the BCG model is its directional Figure 9, which concerns two reasonably comparablesimplicity: you use the money from the cash cows products: the video recorder and the DVD player. The(high market share, low growth) to finance the stars video recorder was developed during a period whengrow (high market share, high growth), you say information was exchanged relatively slowly, as agoodbye to the dogs and keep a close eye on the result of which competitors took longer to market aquestion marks (both low market share in low similar product. This was markedly different in thegrowth or high growth markets). This way the cash case of the DVD player9.flow is distributed within the corporation in the mostoptimal way. Price (€)Porters theory dates back to 1980, that of Treacy & 1500 Video recordersWiersema to 1995. The BCG portfolio matrix was first DVD-playersused in 1969. The fact that these models are stillbeing used proves their strength, but it is the 1000emerging information society that may not havechanged some economic laws, but has put them onedge. 500The accessibility of information and capital 0If there is one development that, during the past fewyears, has been dominant in the way in which Figure 9. Price development of video recorders andconsumers and businesses do business, it is the DVD playersimmensely improved accessibility of information.Consumers, purchasing companies and government These developments force providers of products andinstitutions are now much more aware of what is for services to concentrate on those activities in whichsale, and it is becoming increasingly easier for them they can stand out, and for which they can maintainto compare products and suppliers. It only takes a that distinctiveness for a longer period of time. If acouple of mouse-clicks and telephone calls with product is relatively easy to copy, such as a DVDsuppliers from all over the world to meet their player, prices will drop fast and it will be difficult todemands. Online searches and even online auctions recoup the investment.are steadily replacing relationship-based sales8.18
  • 21. A second major development is the change in flows self-evident, and synergy between products becomesof capital. During the twentieth century, the objective so much more important.of virtually every business was growth. Growthenabled them to achieve benefits of scale, it made a So how to make a profit in such a transparent world,lucrative position as market leader possible, and given the fact that:above all: the business growth and the relatedinvestments were a sensible way of reinvesting the  the availability of information is growing;profits that were made. The only thing that left the  the payback period of new products has to becompany was a bit of dividend. increasingly shorter, and;  shareholders and financers are increasinglyAs the financial sector globalised, it became easier to critical to invest their money in the mostinvest profits from one business in the other if the lucrative activities.latter yielded a better profit or had a lower riskprofile. During the past few years, transparency has Early in this section, I indicated that the chances ofincreased under pressure from large private profits are linked to achieving differentiation frominvestment funds (some of whom are activist your competitors. That is why I will study theshareholders), making it possible to decide per different options provided by Porter and Treacy &business activity rather than per business whether or Wiersema in that respect, and evaluate them againstnot to invest. The added value of a holding or head the help they provide in a transparent economy.office is a permanent point of discussion.Seen from the investor‟s side, new opportunities arise 1. Focus strategy (Porter) and Customer Intimacyas well. Through the internet it is possible to lend (Treacy & Wiersema)small amounts of money to entrepreneurs inemerging countries; real estate funds like the With the focus strategy of Porter and customerCanadian Homburg frequently run marketing intimacy as defined by Treacy & Wiersema it is allcampaigns to sell their bonds. There are various about being relevant to the customer, despite thenetworks for so-called „business angels‟, mainly fact that you do not sell unique products.seasoned entrepreneurs who invest amounts from25,000 dollars up to millions in start-up companies A good example is private banking: specialist banksand help them with advice and new business offer their customers a permanent account managerrelations. who has an overview of all the financial affairs of a customer and who can also offer a solution toAll these developments make it is easier to attract everything. Private banks offer a wide range ofcapital on the basis of a good idea. Active investors normal products such as mortgages, investmentdetermine in which activity they invest and which accounts and insurance, but they mould this into anknowledge and expertise must be combined. As a integrated package for the customer.result, it is specialist organisations rather than largebusinesses that become leaders in the new economy. Knowledge of the customer and the relationship withAs such, the internal reinvestment of money in a customer are hard to copy. Additionally, the habitsaccordance with the BCG portfolio matrix is no longer and way of doing business with that customer may 19
  • 22. become interwoven. Private banks may have a small try to bring this to their attention. You will not begroup of customers, but to those customers they are relevant until that what you promise is exactly in linehighly relevant. with the needs of that one particular buyer at that time.Customer intimacy could also be construed morewidely as a thorough knowledge of what a customer Brands are the carriers of customer relevance. This isgroup is concerned with or what needs they have. For owing to the various functions of a brand, of whichexample, Live Nation is a market leader when it recognisability is the most important. Users willcomes to organising rock concerts. All they do really attribute certain values and features to a brand,is bring artists, venues and visitors together, but they partly based on advertisements, and fill in the rest ofmanage to do this in such a way that many of the the picture with their previous experiences withconcerts are sold out. products and services offered under that brand.I therefore propose to replace the terms focus Being relevant to a market is a sustainablestrategy and customer intimacy with the term competitive advantage, whether it is a small group tocustomer relevance. Customer relevance is the whom you are very important or a large group thatextent to which you are important to customers, values you for certain aspects. Customer relevance isknow how to appeal to them and to catch their linked to your business name or brand name and canattention. It is that attention that makes it possible to be protected by committing your most importantsell products and services. Because of customer staff, by sharing customer and market knowledge inrelevance, customers opt to also buy standard protected databases, and by translating thisproducts or services from you, instead of from your knowledge into the right combination of products andcompetitors (Figure 10). services.The big difference between customer intimacy and If a business targets the market under various namescustomer relevance is that the latter is argued from brands, then you need to assess the relevance perthe perspective of the customer, and as such goes brand. Thus, to most customers Unilever may not beone step further. Today, a lot of businesses have a relevant as a company, whereas brands such assuitable range of products for their buyers, and they Lipton or Dove may well be. The three strategies of The three directions of What happened in the Michael Porter (1980) Treacy & Wiersema (1995) internet age? Current validity  Customer intimacy: There are many suppliers Customer relevance: Focus strategy: having a complete of f ering with a broad of f ering. being seen as relevant targeting on a niche f or specif ic customer groups Customers can choose by your customer groupFigure 10. Development of differentiation on customer focus20
  • 23. 2. Product differentiation (Porter) and Product 3. Cost Leadership (Porter) and OperationalLeadership (Treacy & Wiersema) Excellence (Treacy & Wiersema)The difference between the product differentiation The main difference between cost leadership andstrategy and product leadership - as Treacy & operational excellence lies in the fact that withWiersema emphasise - lies in not introducing a operational excellence the customers efforts inproduct different from the rest just once, but to buying, using or maintaining the product are alsostructure your organisation in such a way that you taken into consideration. Both Porter and Treacy &can introduce a distinctive product time and again. As Wiersema attribute competitive advantage to havingsuch, they acknowledge the fact that new products the lowest price or the lowest overall costs.too can be copied and become obsolete. Cost advantages may arise in different ways: throughDifferentiation in the sense of offering a different (or scale, by completing the learning curve quicker thanthe best) product may at times bring advantages, but someone else, by having the right suppliers orgiven the speed at which products are copied, it is partners, or by having a tightly-run business. Theyoften not a sustainable competitive advantage. can be significant and may form a good source ofProduct leadership is sustainable, provided you profit. The question is to what extent this type ofcontinue to invest in new knowledge, protect that advantage is sustainable in a world where knowledgeknowledge with patents as much as possible, and can be shared swiftly.work on retaining your most important productdevelopers and product managers. Scale size that, according to the Boston Consulting Group, can only be achieved by being market leader,Apart from that, a product these days should not just is also possible by collaborating, or by outsourcingbe different or better, but it should have a your production process to a party that is familiardifferentiation that can be communicated clearly and with that line of business. This will help you completetransparently. This means that this strategic direction the learning curve faster. The suppliers and partnersmust be refined further as: (continuously) having a of your competitor also want to work with you andunique product or unique service (Figure 11). vice versa, and they may even introduce innovations to you first, rather than The three strategies of The three directions of What happened in the to others. Michael Porter (1980) Treacy & Wiersema (1995) internet age? Current validity  Product dif ferentiation: Product leadership: The enormous diversity of (Continuously) having Other economic factors having a better product continuously introducing new products products makes it hard to stand out unique products also play a role: economic growth,Figure 11. Development of differentiation on product inflation, exchange rate movements and trade restrictions may lead toIn the event a business has a broad portfolio, the sudden shifts in the cost pattern. A lot of marketscriterion is that the majority of turnover is generated experience a status quo for a number of years, onlyby unique products or services. Having a single niche to descend into a price war later. In this day and age,product is not enough: the remainder of your cost-based strategies are therefore no longerportfolio will still experience price competition. sustainable by definition (Figure 12). 21
  • 24. The three strategies of The three directions of What happened in the He has studied the Michael Porter (1980) Treacy & Wiersema (1995) internet age? Current validity correlation between the  financial results for each Operational excellence: Cost advantage is easily Cost leadership: having the lowest total costs, copied or leveled down. No sustainable strategy of these strategies. having the lowest costs including costs of your client Scale can be bought Campbell-Hunt discovered that two ofFigure 12. Development of differentiation on costs those generic strategies have a positive effect on profitability: he defines them as Innovation andThis is not to say, incidentally, that operational operations leadership and Leadership in broadexcellence or the quest for lower costs is quality and sales. The Cost efficiency strategy has aunnecessary. On the contrary, for a lot of businesses significant negative effect on profitability. The mainit is a condition for their existence. However, it no components of these strategies are outlined in thelonger is a means to permanently differentiate Table 2.yourself. Today, operational excellence is acommodity: something we simply need. The innovation and operations leadership strategy mainly seems to focus on marketing new specialMcDonalds and the German discounter Aldi are often products (described earlier as unique products) atcited as successful examples of operational high prices. The leadership in broad quality and salesexcellence. These businesses operate extremely ties in nicely with the term customer relevance. Thisefficiently, without a doubt. In addition however, Aldi is about brand awareness and being highly capable ofoffers its customers a very transparent guarantee of serving a wide group of customers with a lot ofquality at a low price, and McDonalds also has a products.strong brand name and the promise that you willalways get the same product. So having the lowest Another conclusion drawn by Campbell-Hunt is thatcosts is not all that matters. Supermarket chain Tesco these strategies do not exclude each other, whereasproves that cost leadership can go hand in hand with Porter for instance claims that combining a Costoffering a wide range of products. leadership strategy with a Product differentiation strategy will lead to being stuck in the middle. Innovation and operations leadership on the oneThe three strategies and their profitability hand and leadership in broad quality and sales on the other each affect profitability in their own way. ThisThe relationship between a companys strategy and would suggest that a business can successfully try toactual profitability has been the subject of a large develop unique products and become relevant to itsnumber of scientific studies. The most important market at the same time.studies carried out before 2000 have been combinedin a meta-analysis by Colin Campbell-Hunt10. From The conclusions of Campbell-Hunt, as well as thethese seventeen studies he distils six generic research about the Treacy & Wiersema strategiesstrategies, each with components (such as a high cited earlier, are based on averages. Individualprice, a lot of advertising or operational efficiency) companies in stable markets, oligopolies or marketsthat are often used in combination with each other. with high entry barriers might have reasonable to22
  • 25. excellent profits. On the other hand, even if a entering into an alliance. It is only as an overallcompany does not pursue a low price strategy, cost strategy that it will prove less sustainable and lessadvantages will hardly be rejected. profitable than being relevant to your customer or having a unique product.Therefore, in the continuation of this book, creatingcost advantages will be treated as a valid reason for Innovation and operations Leadership in broad quality and Cost efficiency leadership sales High prices Promotion Efficiency through: New products Large sales organisation - new products Special products Quality of service - low prices Operational efficiency Product width - advertising Width of the target groupTable 2. Strategies as defined by Campbell-Hunt 23
  • 26. 2. Alliances as strategy accelerator What competences do you have? – and need? Alliances are an important means to obtain new competences for your organisation. However, the choice to enter into an alliance should arise out of the strategy of the company. With the strategy in mind, the first question should be: what competences do you already have? And which do you still need? An internal analysis to assess your own competences should result in a list of strong and weak points. The necessary information can be derived from various sources:  an analysis of your market share or sales figures;  customer satisfaction surveys; but it can also be illuminating to ask your customers why they In the first chapter we discussed the relationship choose to purchase from you, and to ask non- between strategy and profitability. However, strategy customers what you need to do to persuadeAlliance experts has a set format can only be executed with the right resources: them to make that choice;for an Executive Workshop Alliance people, knowledge, machines, brand names or shops.  differences as compared to your competitors, forStrategy. This workshop specifically In case not all resources are available for the strategy instance in terms of company resources, you have chosen, forging an alliance could be a wayconcentrates on linking your products, distribution, personnel qualifications, to obtain them. or the quality of your marketing;strategy and performance withrespect to alliances. Existing  improvements that you are implementing in This chapter is about the decision to choose for aalliances will be evaluated with your company, or deteriorations as a result of strategic collaboration. With the value engineeringshort tests. There is ample room personnel turnover. model, you can select which competences can bestfor discussing your own situation. be obtained through an alliance and which not. The When identifying your strong points, there is always process of forging an alliance is summarised and toFor more information visit the risk of being insufficiently critical. The Resource make things clearer, the definition of a partnership iswww.allianceexperts.com/toolkits Based View11 can then prove useful, by subjecting introduced. The chapter closes with list of ten each strong point to the following questions: common forms of alliances, which will be elaborated in Chapters 3 and 4. 24
  • 27.  Is it a valuable strength? The ability to build the customers but only against high costs, and perfect carriages became worthless once someone else can do so more efficiently, then it automobiles captured the market. makes sense to seek a partner. This is illustrated by  Can the strength be utilised within your the value-engineering model12 (Figure 14). business context? Knowledge of microbiology may be valuable, rare and hard to imitate, but  Components of your product or service with a quite useless within a simple production firm. low customer value and low costs (for instance  Is the strength rare? Is it something only your the transport packaging) can best be purchased. company is capable of, or is it a basic  Components with a high customer value but prerequisite for market operation? relatively low costs for you should certainly be  Is the strength inimitable? Distribution through developed and supplied by your own company. the Internet is not a particular feat any more, For example, right now it would not make sense now that everyone can open an online shop for Apple to have the user interface of their within a day. iPods and iPhones developed by a third party.  Components with a low customer value andDepending on how you score on this list, you may be high costs for you had better be left out of yourin a situation of competitive parity (equivalence), or product or service. As an example: a ten-yearof having a temporary competitive advantage, or of warranty on a watch which most customers willhaving a durable competitive advantage. Figure 13 tire of in five years and replace with a new one.offers an illustration.  For components with a high customer value and high costs for you, it is worthwhile looking at a Organisable partner: this party may have a better Inimitable Valuable understanding of the customers need, or be Rare able to produce or distribute the component more cheaply, and can thus deliver more value-  Knowledge of Competitive parity automotive technology for-money.    Familiar brand name Temporary competitive advantage Value for    Customers can track Temporary competitive the customer courier on the Internet advantage An extensive presentation of Use as Partnership Joe Deklic, VP of Cisco Canada,   Prestigious customers Competitive parity selling point Outsource high on partnering choices can be    found on Slideshare: Patented packaging Durable competitive technology advantage http://www.slideshare.net/asaptFigure 13. Resource based view assessment oronto/build-buy-or-ally-joe- low Procure Remove deklic-cisco-canadaIt is important for companies to focus on the areas inwhich they truly deliver value-for-money. If you canconvert competences into value for the customer, and low highyou can do so at relatively low costs, then youre Costsbetter off keeping these competences under your Figure 14. What activities to perform in-house and which to haveown roof. But if the competences deliver value for another party perform? 25
  • 28. Particularly for a component of your product or what you ask for, so nothing new. In a partnership service that is important to your customer, a you set a common goal with high customer value, partnership delivers greater value than a purchasing and then seek the right resources to achieve that. relationship. In a purchasing relationship you getContact details: Logistics Executivehttp://sg.linkedin.com/in Logistics Executive is part of Logistics Recruitment to employees individually you get different and/darryljudd Solutions, an international specialist in Executive sometimes conflicting messages than when talking to Search and Recruitment for Logistics & Supply Chain them in a group because they are very loyal to theirwww.lrs.net.au management. The company has around 40 boss. The bosses, on the other hand, want to be employees, its own offices in six countries and has a challenged and this is a role an outsider can play.” database of around 70,000 candidates. Darryl Judd, Vice President Global Strategy, explains what role Whereas the normal recruitment business process partnerships play in his organisation. only pays when a candidate is hired, the model for this more consultative method works more to the “The usual executive search process can be a highly advantage of the executive search agency. One third transactional one, based on a job description that is of the total fee, which can add up to 30 or 40% of an sent to a several different intermediaries. With the annual salary, is paid when starting the search. vast majority of executive searches paid on a Another third is paid when a candidate is found and retained basis, you must deliver results and ensure the last third is paid when the candidate is hired. that a suitable candidate pool is identified from a Other business activities such as benchmarking, global perspective. The opposite applies for lower organisational design and talent management level roles, where payment is made once a candidate activities are charged on a hourly or project basis. has been hired. Logistics Executive‟s recruitment activities involve a We try to arrive at a more collaborative approach number of partners in various countries such as Japan, with our customers and, initially, leave out the job Vietnam, Korea and China. Darryl explains: “We have description component. We discuss which no footprint in Japan but we do have international competences are missing in the organisation, why clients with operations there. For us it is relatively there is a vacancy, as well as the organisation‟s easy to find expats in Japan but difficult to find local current management structure. This leads to a better candidates. That is why we collaborate with local understanding of what is required in terms of suitable partners; in a country like Japan it is difficult for us to abilities to complete the assignment. set up an office due to language barriers and cultural differences. In India, on the other hand, the costs for To take part in this type of dialogue, business setting up an office are lower and English is widely consultants need to be experienced enough to add spoken. So we have our own office in Mumbai. value in this field, and customers must have enough confidence in them to open up. In organisations in The fact that we work with partners does not affect Asia you need to start at the right level. When talking our customers; our fee structure remains the same. 26
  • 29. We divide the activities among our partners and they Which of us will conduct the meetings and finalare paid for their specific tasks. In most cases, negotiations is decided upon on a case-by-case basis.Logistics Executive takes care of the front end withthe customer and the partner is responsible for the We guarantee our customers a retention period ofback end with the candidates. If a partner proposes a two to twelve months. If the candidate leaves withincandidate who is already in our database but had not that timeframe we will repeat the process for free.been noticed by us yet, the partner is paid in full. However, out of 900 placements a year, this only comes up two or three times.”Alliances versus other sourcing  By outsourcing these activities to parties that possess the right competences. But then themethods question is, can your competitors not do the same, or have they not already done so?  By taking over a company that has the right market position or the right products. But then the question is, why have your investors not already taken their money from your firm and invested it in the other party?  Entering into an alliance with such a firm, and partly combining your people and resources, sharing your knowledge, and approaching your clients with a broader offer. The option you choose depends on a number of preconditions that occur in any market:  the time available to bring a new product to A nice article with the title market; “Build, buy, partner” can be  the extent of investment and whether a firm found on the website of can afford it; Phoenix Consulting:  the acceptable measure of risk. http://www.phoenixcg.com/ files/Build_Buy_Partner.pdf Direct investment in development activities orTo introduce new competences in your organisation, broader marketing requires a lot of time, certainly if itthere are generally four options to choose from: calls for new competences. Outsourcing is quicker, but requires additional resources due to overhead  By investing in the training of personnel or by and your suppliers profit margin. Both run the risk of hiring the right people and deploying them in investing in a client group that barely responds or in either portfolio management and marketing a product that fails to succeed. communication, or in product development. 27
  • 30. A partnership is hard to combine with a standard extent to which your contribution is unique and notpurchasing relationship. In such a relationship, the easily copied, otherwise the collaboration will sooncontacts between companies are managed by buyers lose value.and sellers, so that the users wishes arrive on thedesk of the product developers or service providers in A partnership also has its drawbacks: it meanssomewhat filtered form. The reason for this is that making your company partly dependent on thesuch wishes are translated into requirements suitable performance and continuity of your partner company.for a formal purchasing document, and these This demands careful partner selection, mutual trustrequirements are subsequently interpreted in the and a solid contract. Additionally, you need to shareprocess of developing a solution. So at the end of the the revenue of the collaboration. The task is thus today, the solution that is offered often does not meet jointly increase the size of the cake, rather thanthe original users wishes. obtaining a larger piece of the cake.Moreover, a standardised purchasing process such as It can be difficult for employees to view anothera public tender often defines a minimum quality company as a partner, particularly if there is a stronglevel, and the cheapest bidder to satisfy that level is we-feeling and the partner is a competitor in certainselected. There is thus no incentive or even the areas. It requires a lot of communication andoption to offer a more expensive product, which explanation by management, and some supervisionmight yield considerable benefits to the customer of how the employees of both companies get tofurther down the line. know each other. Moreover, acknowledging that the other party perhaps has a better idea or better workA take-over or merger directly guarantees access to method implies that your own performance in thisan existing customer base or an existing unique respect is lacking. The tricky thing about working withproduct portfolio, but often also implies investing in a (possible) competitor is that there are alwaysoverlapping people and resources or non-strategic nuances to observe; adamantly exclaiming thatactivities. Given the market preconditions, an alliance "These are my new friends with whom I can sharewith a complementary party is therefore preferable. everything" is not going to work either.Competences are made available immediately, theinvestment sum is often limited, and the risk of the In 2006, the major competitors Microsoft and Novelljoint activity is shared. embarked on a collaboration in which they would adjust their software to one another in such a wayThe best collaboration results from both parties that their products became more compatible withincontributing unique elements, such as: computer networks. Microsoft chief Steve Ballmer was very pleased about the alliance with Novell.  geographic spread; Nevertheless, the two enterprises remain fierce  contributing market or product knowledge; competitors. As Steve Ballmer remarked: "If someone  eliminating risks; asks me what operating system is best for their  arranging the financing. company, my reply is: Windows, Windows, Windows!"The essence of a partnership is that it is to bothparties benefit. It is important to determine the28
  • 31. In some cases, sufficiently significant partnerships objectives should be formulated first. What marketdemonstrably have a favourable impact on a (product, geography, distribution, payment model) docompanys stock price. A study conducted between you wish to target, and what competences does this2000 and 2002 into almost 900 announcements of require? These are the first steps, as presented inalliances involving German listed companies revealed Figure 15.that, on the day of the announcement, the stockindex rose an average of3.8%. After two days Required Objectives competencesthat figure still stood at Partner Collaboration Implementation2.5%. The increase was selection agreement of collaborationstrongest in high-tech Own competencessectors and for smallercompanies entering an alliance with a larger Figure 15. Steps in the process to entering collaborationcompany. Licensing agreements and R&D allianceswere valued more than marketing alliances13. You will already possess some of the competences or resources, or they can be developed with relative ease. The contrast with the competences you need toThe process of forging an alliance obtain help define what your prospective partner should contribute. This is the basis for partner selection, in which you determine what company offers the best potential for collaboration. This should lead to the selection of one or two parties that seem promising candidates for a partnership. The next step is to draw up an agreement to formalise the collaboration. The actual implementation of the partnership will still require attention, however. Although the company boards may soon find themselves in agreement, people on the work floor still need to get to know each other and make practical arrangements. As soon as you have established what competences you possess and which you still need to build, you can consider developing these in-house or obtaining them by working with a company that already has that knowledge. The result of this deliberation depends on the extent to which that knowledge or those resources help you to consolidate your unique market position.Partnerships can be an effective way of achievingyour business objectives. But then your strategic 29
  • 32. In the partner selection phase, you need to Ideally, a partner possesses knowledge or resourcesAlliance experts offers a partner determine with which company you can achieve the that lie just beyond the reach of your own company,selection toolkit. In three workshops best collaboration. Here, the three most important or that would require too much time or money towe will help you to make a well- aspects are translated into search criteria: build up (Figure 16). Through the interaction withfounded choice for an alliance your partner you can then acquire knowledge ofpartner. First we determine selection  Business model: Which enterprise possesses the these resources and develop your company one stepcriteria, then we offer techniques to competences that I lack to be successful in the in that direction, without posing a threat to yourwork towards a shortlist and we market? What else does the company do? Is partner.support you in making the final there an overlap in activities or will I actually bechoice. Please visit moving into a wholly other sector?www.allianceexperts.com/toolkits  (Contractual) Basis: Is the company willing to enter into an alliance? Does it suit their Scope partner strategy? Can we agree upon a suitable form? Scope that can be reached by the partner too  Balance between partners: How is the relational Scope that can be far away „click‟? Is it a party with a comparable culture Scope of right reached alone and corresponding priorities? Is there scope for partner Scope trust in this collaboration? Will I retain sufficient of own company influence in this collaboration and is it possible to preserve the character of my company? Scope partner too close This "3-B model" is supported by research by Michigan State University14 into the steps that Figure 16. Finding the right partner based on business successful businesses take in their partner selection. scope It is first of all important that a partner can provide The contribution of valuable competences should the lacking competences. This means that the partner always be reciprocal: your company must also possesses patents, knowledge, people or resources contribute knowledge or resources that are valuable that are valuable to your company. Here, two aspects to your partner. If not, then the collaboration lacks a need to be taken into consideration: solid foundation.  The knowledge must connect to the knowledge An essential step in the partnering process is to draw already available within the company. If there is up a collaboration agreement or partnership too much distance between the two companies agreement. In this agreement the partners define knowledge or working methods, then it will be how they wish to work together, for how long, and difficult to set up a successful collaboration. how the costs and revenue will be divided. In the  The two companies scope should be sufficiently partner selection stage, one of the questions is distinct to avoid getting in each others way. The whether the strategies of each of the partners allow collaboration often has little value for for a model with shared governance and long-term overlapping areas, and can instead frustrate a dependency. How is the partner company structured straightforward competitive situation. and how will the alliance be positioned? Is the 30
  • 33. partner open to the key contractual arrangements Finally, it is advisable to gauge what influence your The contract has been signed, andthat you want to see in place, and what are his non- company can exert on the collaboration or alliance15:negotiable demands? suddenly a large group of employees from both sides need to start working  Is your company sufficiently relevant to theA partnership is built on the belief of two company together. Alliance experts has a toolkit success of the collaboration?boards that working together will deliver benefits, for this process. In one or two kick-off  Is your company also formally authorised toeven if the risks and returns are not entirely clear yet. meetings we organise that people are take important decisions, or is this authoritySeeking to make a watertight contract therefore entirely in the hands of your collaborative getting acquainted, we help to clarifymakes little sense. For example, very promising partner? cultural differences en guide the groupproducts may suddenly lose a large part of their value  Do you have direct access to customers, and will towards operational agreements. Seefor a variety of reasons. The emergence of mobile they be able to see your added value? www.allianceexperts.com/toolkitsphones dealt phone booths a crippling blow.  Do your people have a leading role in customerAmended legislation put an end to certain equity relations, and will they be the first to hear ofinsurances, and to mediation agencies in childrens significant developments?day-care. This can also have unexpectedconsequences for underlying collaborative If the majority of these questions must be answeredframeworks. negatively, then it is wise to pursue a different form of collaboration, or to seek another partner.Part of the process of arriving at a definitive contractcan be to conduct a „due diligence‟ investigation, as is Various surveys have shown that relational aspectsnot uncommon in takeover situations. The purpose of have a major influence on the success of athis investigation is to confirm the validity of partnership. Does working together feel good? Isassumptions underlying the collaboration, such as: there a sense of trust between the partners? The initial meetings and talks are often enough to get a  Have the rights to the technology been feeling for these aspects. sufficiently established?  Are claims concerning customer numbers and A reliable test can be incorporated by organising a distribution channels accurate? workshop, before the signing of the collaboration  Is the partner truly capable of achieving a cost agreement, in which the people operationally benefit? involved at both sides work together to establish a  Is the partner sufficiently robust financially to project plan for the first period. A neutral facilitator meet his obligations of the collaboration? may be appointed to lead the workshop. If a first and basic step, such as making a plan within a clearlyThis investigation can for instance be conducted by a defined context, already runs into problems, then it isneutral external consultant, to prevent any trade important to review the collaboration plans, at leastsecrets from passing from one partner to the other. with regard to its form. 31
  • 34. REAAL / De GoudseContact details: The collaboration of the two insurance companies ensure that we have enough economies of scale tohttp://nl.linkedin.com/in/ REAAL and De Goudse started in 2006, and it offers a be competitive." Frank: "For REAAL, combining ourfrankrensen good example of how an alliance like this requires a portfolio with De Goudse was a good way of cutting lot of attention at the operational level to be costs, while retaining part of the upward potential ofwww.reaal.nl successful. Though profitable, the alliance has a lot our occupational disability portfolio." more potential which the alliance managers on bothhttp://nl.linkedin.com/pu sides are striving to realise. The reason for starting the collaboration was ab/ren%C3%A9-de- change in Dutch law regarding occupational disabilitypeuter/4/716/643 De Goudse is an independent insurer with a history insurances in 2007. A large part of the risk of paying dating back to 1924, when Geert Bouwmeester wages during the first two years of illness waswww.degoudse.nl founded the company. Today, his descendants still transferred from collective funds to the employer. The own almost all shares in De Goudse. The total annual employers had the option of insuring themselves for turnover is about € 720 million and it employs around these costs. The risk for the period after two years is 900 people. The company is focusing increasingly on partly covered by collective funds, and employees small and midsized enterprises, without losing its can insure themselves against loss of income for the strong position in the market of private insurances. remaining part. De Goudse holds a particularly prominent position in property, income and life insurance. As a family- De Goudse is active in both types of insurance, and owned company, De Goudse can afford to pursue a for them it is an important product. REAAL was active long-term, aiming for long-lasting relationships with in the employee insurances sector only because they its clients and intermediaries. had taken over the portfolio of a small insurer. There was little knowledge about the product within REAAL, REAAL has a long history as well, starting with the but they did feel that this type of insurance should be merger of two insurance companies that were active part of their portfolio. This made the option attractive from the start of the 20th century. The REAAL group to partner with another insurer. In the Netherlands was formed together with three banks, and has there were only five companies with a large enough continued to grow through the merger with the SNS occupational disability portfolio. De Goudse was the group and the acquisition of five smaller insurance only one that was independent, as the others were companies. This makes REAAL one of the largest brands of larger competitors. insurers in the Netherlands today. REAAL typically pursues a low cost/operational excellence strategy. Since the board members from both companies regularly met at business events and social occasions, Frank Rensen, commercial manager at REAAL for the it was easy for REAAL to establish contact. There was small and midsized market, and Rene de Peuter, certainly a match at a personal level, and both sides alliance manager for De Goudse do the day-to-day were willing to let the other gain as well. It only took management of the alliance. They have been putting a short time to draft an agreement and to set up an a lot of effort into the alliance since 2008. Rene: "For alliance that propelled the combination into the top- De Goudse this is primarily a distribution agreement 10 of collective occupational disability insurances in to strengthen our position in the market and to the Netherlands. 32
  • 35. How is this alliance structured? The concept of the The agreement is not perpetual: every three yearsinsurance, including coverage and fees, was the parties can decide to break up. In that case andeveloped by De Goudse. REAAL arranges the external party will estimate the value of the portfoliodistribution through its intermediaries and takes care and each party can bid on it. Up to now theof all commercial activities. De Goudse draws up the investment results have been good.policies and handles all the administration andclaims. For these kinds of insurances REAAL works The prices are set by De Goudse, and are no differentexclusively with De Goudse. than those for their own sales or for other partners. Discounts are decided on together. Even volumeThe financial model differs somewhat for the two discounts that customers of REAAL get are sharedkinds of insurances. For the employers insurances with De Goudse. Frank Rensen: "I think the power ofbearing the risk of payments for up to two years of this alliance lies in the processes that are clearlyillness, REAAL is paid a fixed percentage as provision. described, combined with sufficient room to interpretDe Goudse carries 100% of the risks of the portfolio. them in a practical way. Before 2008 there were onlyThere is no bonus structure, but REAAL shares in the meetings at board level, but that was not enough toprofits of the portfolio, not in the losses. make the alliance successful. At the operational level the alliance was not perceived as important. ReneFor the employees insurances after two years, the and I started holding regular meetings in 2008,portfolio risks are shared. De Goudse accepts new speaking to each other every week. We put a lot ofcustomers, but REAAL is consulted whenever bigger effort into communicating the purpose to the salesrisks are involved. De Goudse gets a percentage of representatives and into making the processes runthe fees to cover the costs of administration, and smoothly. That has had a clear impact, but we stillevery quarter the portfolio results are shared with have work to do. The portfolio has grown since 2006,REAAL. These results are calculated as the insurance but not as much as we wanted to see.fees minus costs and damages, plus the mutations infunds due to reservations and investment results. REAAL hardly has any other alliances, but for DeCosts for product development and IT for De Goudse Goudse setting up alliances has become part of theare traded off against the sales costs for REAAL. strategy. Rene: "The goal has been from 2009 to startProvisions for the intermediaries are directly one or two distribution alliances each year. We preferdeducted from the insurance fees. to take the lead rather than being approached, and with our board and part of the management we select the parties that we wish to collaborate with." 33
  • 36. Ten forms of alliances Organisation Market Alliance Company formThere are many definitions of partnering or Collaboration Transaction Agreement/ Merger orpartnerships, each from its own angle. A frequently mechanism joint venture take-overused definition is as follows16: Features Agreement with Open-ended One single a clear scope contract companyAn alliance is any governance structure involving anincomplete contract between separate firms and in Limited mutual Mutual Control over all dependence to resourceswhich each partner has limited control. dependency achieve goals Internal No separate Parties remain operational 17Features of a partnership are : operational costs separate management companies Option of  It involves two or more companies that pursue a Shared divestiture common goal, yet remain independent. This can decision making be pursued by means of an agreement, or within a separate legal entity: a joint venture. Figure 17. Alliances as intermediate form between  Both parties manage the alliance and share in market transactions and an integrated company the revenue. Costs or revenue are not necessarily known beforehand. Partnering often involves sharing risks. For example,  Each of the parties contributes in strategic areas, a customer-supplier relationship may develop into a such as technology, products, distribution true partnership if both parties decide to bear the channels, etc. risks that they are best able to manage, and if they both commit to improving the shared product. ThisA partnership may be viewed as an intermediate can sometimes require a different mechanism thanform between an open market and bundling activities setting a fixed price for a predetermined amount ofwithin a single company. This is shown in Figure 17. products or activities.In the market the parties work together on the basisof individual transactions. The mutual dependency The remainder of this book will employ adoes not extend beyond supply and payment, and classification of alliances into 10 basic forms, eachthere are no separate operational costs, aside from with its own goal, structure and intensity. This maypurchasing and sales activities. represent a wider scope than most other authors use. However, all these forms occur in practice and meetThe organisational form at the opposite side of the the definition given above. The basic idea is alwaysspectrum is the bundling of activities within a single one of the three aforementioned competitivebusiness, for instance through a merger or take-over. strategies: increasing customer relevance, creating aThis yields full control over all required resources, and unique product, or seeking cost benefits (seealso makes it possible to sell off certain activities. Figure 18).34
  • 37. amount to a partnership. Strategy Purpose of the alliance Basic form This is demonstrated by Using the other partys local the pharmaceutical Distribution agreement presence and service industry. Expanding ones own Franchising perceived presence The last form mentioned - Customer Increasing the chance of proposition alignment unusual supplier risk - relevance obtaining leads and referral should also be explicated. Expanding ones own market In legal terms this often Collaborative offering to larger projects involves a purchasing Utilizing the relevance of the agreement between a Co-branding other partys brand customer and supplier, which does not Utilizing the other partys Joint R&D necessarily qualify as an development capacity alliance. However, if the Unique product Utilizing the other partys supplier accepts a risk Technology licensing technology that goes beyond the usual in his operational Achieving scale advantage and risk reduction Shared investment management, then it may be termed a partnership. Reciprocal hiring Cost advantage Limiting ones own staffing agreement This applies, for example, to outsourcing, in which Utilizing the other partys Unusual supplier risk the supplier takes on cost benefits and experience personnel from the customer, often withoutFigure 18. Ten forms of alliances any guarantees as to the amount of work he can expect. Such mutual dependency and sharedSome forms require further explication. Distribution in operational management also emerge in public-itself does not necessarily imply a partnership, private partnerships, as when project developers takecertainly if it concerns the purchase and resale of on financing and long-term maintenance obligations,goods and standardised services. However, as soon as for instance for highways.the supplier and distributor jointly devise a plan toplace goods and services in the market and to Chapter 3 takes a closer look at the various goals ofincrease the market share, we may speak of a an alliance and how these can serve to generatepartnership. value. Chapter 4 examines for each form individually how this value can be divided between the partners.The same applies to technology licensing. This may Finally, Chapter 5 offers some suggestions on how toamount to nothing more than reselling a use right to establish the structure in the form of a contract.a patent or to software. But as soon as this iscomplemented with knowledge transfer or ifexclusivity agreements are made, this may certainly 35
  • 38. 3. Creation of value This chapter explores the question what the specific value of an alliance is, and how this value can be quantified. This is a requisite component of any business case when seeking to collaborate. The three generic strategies -- customer relevance, having a unique product and striving for cost advantages -- will serve as a classification structure. Increasing relevance for your customer The term customer relevance pertains to the access a company has to offer its products and services to its target group. After all, any target group, whether it consists of consumers or people with purchasing responsibility within a company, are exposed to so much information and so many opinions and offers, that they have built up a highly effective filter in response. In addition, they exercise a great variety ofIn Chapter 1 we examined how companies can set tactics to rid themselves of unwanted promoters,themselves apart and in that way enhance their collectors and salespersons.profitability. Three generic strategies emerged here:increasing your relevance for customers, offering a Customers will pay attention to your product if yourunique product, and achieving cost benefits. message is relevant to them at that moment (seeParticularly the first two yield a sustainable Figure 19). This means that the promise held out bycompetitive advantage. your brand, and its elaboration in products, service, marketing communication or distribution, connects toChapter 2 discussed the importance of alliances as a their actual need. Customer relevance thus beginsmeans of accelerating your strategy. Specifically with a clear brand promise.when a partner possesses competences that yourcompany cannot develop easily but that do add muchvalue for your customer, it is wise to enter into analliance. We subsequently identified ten basic formsof alliances.36
  • 39. several other brands, and is found to be, say, more powerful than 30% of those brands, and less powerful than 70% of the other brands. Research by Frank Verbeeten and Pieter Vijn among 70 brands has shown that there is a statistical relationship between brand power and that brands profitability19. For every 10% of brands that you leave trailing, your increases by around 0.2%. A brand is relevant if the fulfilment of its promise connects to actual customerFigure 19. When does an online ad get noticed? need. This will happen if their actual need is answered by the promise that your brand makes, andAs mentioned in Chapter 1, brands are the carriers of how this is fulfilled in products, services, distributioncustomer relevance. A brand need not necessarily be or your marketing communications (Figure 20).a registered name with a logo. Even a trade name, a Customer relevance always starts with a clear brandfamily name or even the name of a region can be promise.seen as a brand.Consumers group Portfolio Genericproducts and services management needs Actualunder such a brand Fulfillment of Customer customername and attribute your brand promise relevance needsvalue to it. Customer Distribution and Context / communications Situationrelevance is thereforemeasured per brand. Figure 20. Customer relevance increases to the extent that brandRelevance is also one of the four pillars under the promise and actual customer needs overlapBrand Asset Valuator of Young & Rubicam18. Variousresearchers have –partly on basis of this model– Every person has a number of generic needs: security,studied how the different components of brand value friendship, relaxation, efficiency and success.relate to a companys financial results. All studies Depending on the context or situation you are in,emphasise the predictive value of relevance and these generic needs are translated into actual needs.brand stature for financial results. Again depending on the situation, one or more of these generic needs will be dominant,These studies always measure relevance on a relative complemented by needs that arise through ascale. This means that one brand is compared to customers expectations with respect to a certain 37
  • 40. situation. For example, when spending the night in a that you provide as a company. These companyhotel you do not expect anyone to enter your room service „promises‟ could be:unasked (privacy), that drinks in the bar are chargedto your account (convenience), and that there is  supply reliability,wake-up call service (efficiency). At higher-end hotels  applications knowledgeyou will expect a laundry or dry-cleaning service  assuming responsibility, e.g. for part of their(give me comprehensive solutions) and personal supply chain process.attention. Christopher Lovelock, in his book „ServicesThe other aspect is the brand promise and how this is Marketing‟21, gives 8 ways to differentiate on servicefulfilled. If you want to have a meal, that need will aspects:differ depending on whether youre alone or withyour family. A companys response to this may lie in  Providing information (e.g. about the products,the right portfolio management of the products and how to apply them)services it offers. It also makes a difference whether  Advising customers (tailored to their specificyoure in town or in an amusement park, and a needs)companys solution here lies in its distribution  Making exceptions (handling special requests,management. And finally, in this particular case, you complaints, restitution)do not have this need for a meal at each and every  Delivery (speed, timeframes)moment. Thus, being relevant means that companiesmust present you with their offer at the right time.  Fulfilment (planning, flexibility, change orders)Marketing communications and personal sales are  Invoicing (EDI, clarity of the invoice)important means to achieve this.  Payment and payment conditions (local bank account, payment term)Businesses that deliberately invest in relevance also  Hospitality (is the client welcome, how is hetry to flesh out that brand promise: by formulating treated)the promise, communicating the promise, andespecially also by living out this promise in different Both with commodity products and unique productsways. BMW uses the slogan “BMW makes driving you can apply one of these differentiators to becomegreat”. The company tries to sustain that promise by a relevant supplier for your customers. This can leadputting only truly well-designed products in the to differentiating brand promises such as: “We delivermarket. For example, when all car brands had already on time”, “Clear contracts”, “The best advice”.launched an SUV, BMW also had one in the pipeline,but it wasnt thought good enough. It wasnt until Alliances can help achieve relevance for customersBMW had thoroughly developed the X5 that they more quickly. The value of alliances can best berolled it out into the showrooms. quantified by considering the costs your own company would have to make to accomplish aAccording to a Booz Allan & Hamilton article entitled comparable boost in relevance. This is elaborated„How to brand Sand‟20, you can differentiate your further for the five basic forms of alliances that aimoffering through the product or through the service to enhance customer relevance.38
  • 41. Distribution agreements and franchising return for taking a greater interest, will demand the exclusive distribution rights for his region or customerThese forms of collaboration each seek to increase group.the number of sales points for your product orservice. This can be in the form of your own shop, an In case of franchising, the relationship becomes closerInternet channel, or by being included (as brand) in yet. Here, the distributor enters into an exclusivethe assortment of a larger store. Your distribution bond with the supplier, no longer working under hischannels ensure that the customer encounters your own brand name but only under that of the supplier.products or services more quickly and can purchase It is no longer or hardly possible for the distributor tothem more easily. sell products or services of another supplier, and the distributor/franchisee is bound to strict rules withGenerally speaking, a distribution channel fulfils the respect to shop interior and marketingfollowing functions: communication.  Information: to gather and spread market For both exclusive distribution and franchising, the research and intelligence parties share in the risk that sales may disappoint and  Promotion: to develop and spread thus not justify each others efforts and investments. announcements about special offers In case of a distribution agreement the distributor  Contact: to communicate with potential buyers holds the reins, and the supplier will want to steer  Matching: to adjust the offer to a quantity that along through generic marketing. In case of meets the needs of the buyer, including franchising it is generally the supplier that holds the assembly and packaging reins, and the franchisee will want to steer along  Negotiation: to reach agreement about the price with respect to his own sales area. and other conditions concerning the offer The value of a partnership for a supplier can be  Physical distribution: transport and storage quantified by considering the effort the supplier  Financing: applying capital to maintain stocks would have to make in order to set up an alternative and incur costs before payments are received means of distribution that achieves the same effect.  Risk taking: to maintain stocks of products and Relevant aspects to consider here are: invest in processes without guaranteed sales.  elaborating a shop concept;If distribution takes the form of a distributor placing a  leasing or buying and then furnishingnumber of the suppliers products on his shelf and commercial space;adjusting his purchase depending on the sales, thisdoes not meet the criteria of a partnership. There is  leasing or buying and then furnishing saleshardly any risk sharing, and certainly no joint offices;operational management. This changes as soon as  hiring, training and managing sales personnel;the supplier and distributor decide to work together  conducting local marketing campaigns andin marketing, sales and delivery. As a result, the developing sales promotion activities;distributor will take a greater interest in the suppliers  tending to the financing and possibly theproduct or service. It may be that the distributor, in storage of goods. 39
  • 42. Working with ones own distribution is particularly an portfolio management constitutes the core of theiroption if the sales activities require little shop or marketing policy.office space, the work can easily be scheduled, andextensive travel is unnecessary. In virtually all other By choosing for one or a few alternatives at most,cases, working with distribution partners or rather than selecting all products, the customer isfranchisees will be a cheaper option, even if these offered a pre-selection. This saves the customer frompartners only spend part of their time on the product making complicated choices, and regardless of theportfolio. precise purchase, the quality is satisfactory. Combined with the availability of the products and the certaintyFrom the distributors point of view, the value of an of not needing to go somewhere else afterwards, this(exclusive) partnership with a supplier is that it makes Office Depot a relevant party for manyenlarges his portfolio (for the quantification, see next entrepreneurs.paragraph), it offers better marketing and salessupport, and it enables him to set up a good Portfolio management also applies at a larger scale,purchasing process. The advantages for a franchisee when choosing in what activities the company shouldare even greater: he can participate in a invest. Thus, the Boston Consultancy Group portfoliocomprehensive and proven shop concept, will receive matrix concentrates mainly on market growth andcoaching in his operational management, and only market share in a certain activity. This activitiesneeds to concentrate on local marketing and sales. portfolio need not be relevant for the customer,This does come at a price, however, as will be however, so there is little of synergetic value fordiscussed in Chapter 4. shareholders here. A company should therefore seek products and services that represent a relevant and mutually reinforcing combination for customers.Proposition alignment and collaborative offering Entering into a partnership may be an attractivePortfolio management is an important means of alternative to developing and producing orincreasing your relevance for a target group. By purchasing and reselling a product or service in-including more special, complementary or even lower house.priced products or services in your offer, you aresubstantiating your brand promise. However, this If two businesses decide to align their portfolios andneed not necessarily be the offer of one single to refer to each other, this may represent addedcompany; if two or more suppliers decide to align assurance for the customer: he may assume that thepropositions, or to refer to each other, or to supplied products or services are compatible, or thatcollaborate in the offering, they can achieve greater he will, at the very least, be informed of anyrelevance for their market. necessary adjustments. This assurance is of value to the customer, and may thus justify a higher price.Yet to remain relevant, it is important that theportfolio displays some measure of synergy. Thus, it An alternative would be to calculate how much itwouldnt make sense for McDonalds to start selling would cost the company to purchase the goods orvegetables, but it would if they started offering services directly and to resell them. In case of goodsveggie burgers. Also for a company like Office Depot, one should also consider the costs for storage and40
  • 43. physical distribution, and in case of services the costs reselling part of the offer, the company must eitherof matters such as quality inspections and idle run greater risks, or must pay a higher price to covertime/unused hours of personnel. those risks. Moreover, such a construction often laysIf two businesses decide to collaborate in their claim to working capital, since suppliers generallyoffering, this yields even more value for the wish to be paid for their part before the customercustomer. Provided all is specified properly, it offers pays for the whole.the customer a contractual guarantee that the twofirms products or services are compatible, and that Determining the value of collaborative offering ishe is saved from having to coordinate the delivery. generally independent of the chosen legalHe is furthermore purchasing from a larger entity, framework. It can be done through contractualwhich offers greater delivery assurance. This may collaboration, or in the form of a new legal entity.prompt the collaborating firms to increase the prices, Chapter 5 will look at this more closely. The mostor it can enable them to bid on orders that would important variance in calculating the value concernsotherwise be beyond reach. the risk of having to pay a substantial customer claim, whether or not jointly with the other partners.Here again, the alternative is to calculate what a However, under normal circumstances this risk oughtcompany would have to do in order to offer the not to dominate the scenario when entering intoentire product, if at all feasible. In purchasing and collaboration.Global Workspace Alliance Contact details:Getronics is one of the largest IT service providers in around the world was not a convincing way toEurope and has been part of the telecom operator proceed. A new model was needed with better http://nl.linkedin.com/in/ivanvogelsKPN since 2007. It was split off from Geveke aligned partners. Selling off a number of country-Electronics and taken to the Dutch stock exchange by based organisations, in a number of cases Getronics www.getronics.comTon Risseeuw in 1983 and grew rapidly in the retained a minority share. This made it attractive fornineties through various acquisitions. In 2001 Getronics to collaborate with these specificGetronics took over Wang Global, but was affected companies and to jointly strive for growth.heavily by the collapse of the internet bubble and thefinancial construction. Getronics shrank from 35,000 The alliance was formalised in early 2009, withemployees in 35 countries to 13,000 employees in 13 Compucom in the U.S., Service One Getronics in China,countries and tried to sell as many assets as possible, Getronics Middle East, Tecnocom in Spain and Southto be able to keep on refinancing debt made to buy America, NTT Data Getronics in Japan and APX inWang Global. France. The fact that companies in China, the Middle East and Japan continued to carry „Getronics‟ in theirThe rapid shrinkage had a major impact on servicing name was a provision made during the sale of thelarge internationally active companies like Shell. companies, but aside from Getronics minority share,Competition with IBM, HP/EDS and CSC was strong, these are independent companies.and just having field service partners in countries 41
  • 44. All partners have different types of shareholders, In a commercial process there is always a primeranging from stock-listed companies like NTT Docomo contractor, and that is the partner in whose area theto private investors as in the Middle East to family- head office of the client is located. There are a fewowned businesses as in France. The size of the pricing principles to prevent uncompetitive as resultcompanies varies as well: Getronics and Compucom of the partnership structure. These are:are large companies, while in Spain, China and Francethe partners have just over 1000 employees. Each of  There is no margin stacking, every partner onlythe seven alliance partners have different field makes a profit on his own contribution;service partners in their region, together covering 35  Every party bears all risks associated with hiscountries and 80% of the global economy. scope of work, these risks are not forwarded to the prime contractor. The only exception isThe alliance is structured with one contract, and there when turnover for a subcontractor is very low.is no legal entity. The CEOs of the partner companies  Only the prime contractor can include costs formeet twice a year to discuss strategic issues, while a overall project management, for the rest hemore operational steering committee meets every only takes profit on his own activities and owntwo months. Every partner dedicates some risks.employees to the alliance, which adds up to aroundten sales persons and one marketeer. In addition, in The prime contractor will conclude an outsourcingJuly 2009 Ivan Vogels was appointed as alliance agreement with the client. Between the partnersdirector, responsible for the further growth and there is a reciprocal general service partnerpromotion of the alliance. agreement, supplemented with further client-specific agreements.Ivan explains: “One of the first tasks was to positionthe alliance as a separate entity and as an alternative As Getronics holds minority shares in all the partners,for our large competitors. Apart from the ongoing it has an inherent interest to do business with thesebusiness wins, one of our first successes was that the companies. This does not apply the other wayalliance was mentioned in the Magic Quadrant of around, but here the exclusivity of the partnership isGartner. This is one of the leading market intelligence arranged through the alliance agreement. Ivanagencies in our industry. Furthermore, some basic Vogels: “Equity swaps could be an interesting tool,things had to be arranged such as a website and especially with new partners, but it currently does notmarketing materials.” have the highest priority. My first aim is to let the smaller partners grow to a more substantial size, soWhereas Getronics has a customer intimacy strategy, that the alliance is more balanced.”the alliance has more of a product leadershipstrategy. Ivan: “We strongly focus on providing IT The various partners particularly need to beworkspace solutions, otherwise our attention gets stimulated to focus their sales efforts on internationalscattered. There are not many companies with a rather than local business. This needs to be achievedworldwide offering like ours, and this enables us to by incentive schemes. At the moment these schemesoffer unique functionality.” are based on the turnover in the respective countries42
  • 45. of the sales persons. Ivan has recently received very expensive to build up this sales power ourselves.approval for a proposal to pay 5% of the gross margin On the other hand, through the pricing policies in theof the first year to the alliance partner that did the alliance we avoid margin stacking of 15% or more,commercial work. This money can then be used to as would commonly occur if we worked with otherreward the sales persons involved. types of partners. This makes us more competitive, and that is something we see reflected in our results.The value of the alliance for Getronics lies in the Our international activities are doing well. Theextensive sales network and the brand value of the alliance has over 300 large customers throughout thepartners. Ivan: “When we sold our activities in the world, of which 35 truly global customers that couldU.S., we lost 150 salesmen as well. By collaborating not have been served without the alliance.”in this alliance, we partly get them back. It would beCo-branding  Symbolic co-branded products: the product of one of the brands is augmented with just theCo-branding involves utilising the value of two exterior features of the other brand, such as adifferent brands. Co-branding closely resembles two cereal that is linked to Disneyworld, or theother forms of alliances. If it concerns the combined Ferrari laptop by Acer. The actual product is notpromotion of two different products, each belonging altered.to a different supplier, in a single offer or in one  Ingredient-branded products, in which anmarketing campaign, then this is referred to as joint ingredient, component or technology of onepromotion. This is actually not a form of co-branding brand is added to the other brand, with explicitbut of collaborative offering. reference; for instance Dr. Pepper soft drink with NutraSweet or Liga Yobreak children‟sOn the other hand, it may be that two companies biscuits with Danone Yoghurt.collaborate to develop an entirely new product, suchas moisturised shaving by Philips and Nivea. Another A number of aspects are important in co-branding.interesting example is the collaboration between First of all, the brands should fit together in terms ofBiodermal and Davitamon to develop tablets that their values and appeal. The collaboration betweencare for the skin from the inside. This is an example Swatch and MSN, which lets you receive messagesof joint R&D as described further on in this book. This from friends on your wristwatch, is a successfulneed not necessarily result in co-branding; it might match because both brands engage a young targetbe handier to market the product under the brand group. The earlier example of the fast Ferrariname with which the product is most closely teaming up with somewhat „nerdy‟ Acer is not asassociated. If the other brands contribution is only good. Since a brands product portfolio supports thepartly visible, this could create some confusion. brand experience to a significant extent, the portfolios should also fit together intuitively. Thus, aBetween these two extremes we find the two most McDonalds sales outlet inside a clothing store is not acommon forms of co-branding22: good idea. 43
  • 46. A new product that is the result of two brands comparison to other cartoon movies, then it mightcollaborating should primarily mesh with the values add only 10% to a box of cornflakes. The reason isof those brands, rather than with their other products. that the entertainment aspect for which Disney isIt wouldnt be such a surprise if Hummer were to famed plays a subordinate role with respect tostart making sturdy kids strollers, even though the cornflakes, where other aspects dominate such asfirm mainly builds cars. Engaging in a collaboration nutritional value, flavour and convenience.may help improve the plausibility of brand-alienaspects in the customers perception. In addition one must ask what the position of the added brand is in comparison to the main brand. ForPhilips entered into collaboration with, among others, Macbooks by Apple, for instance, having an IntelSwarowski for the manufacture of a luxury, crystal- processor inside‟ may not carry as much weight as forstudded USB stick. Their goal was not so much to sell a weaker computer brand such as Toshiba.large numbers, but rather to adjust their respectivepositioning. The partnership enabled Philips toenhance the status of its products, while Swarowskis Developing a unique productassociation with a high-tech company allowed it toupgrade its somewhat old-fashioned image.Consumers often see one of the two brands as moreimportant than the other. This is termed branddominance. This is generally due to the fact that onebrand triggers more associations in the consumersperception, for example thanks to brand familiarity,the promotion upon introduction, the function of theproduct, or the distribution. Considering tablets withbeneficial properties for the skin: should we associatethese with skin creams (such as Biodermal) or withvitamin pills (such as Davitamon)? It may thereforeprove useful to make one of the brands dominant,and to give the other brand a supporting role.Co-branding actually means relying on the value ofthe added brand. The independent value of this canbe calculated reasonably well using methods such asthe Brand Asset Valuator (see above). Usually, theadded brand is used to highlight certain aspects ofthe product. Accordingly, the added value should onlybe seen in relation to this aspect. Having a unique product is an important means of setting yourself apart on the market and of keepingSuppose, for instance, that the Disney brand on a DVD your competitors at bay. It actually means that youcartoon makes it possible to ask a 50% higher price in have a small monopoly. This gives protection for44
  • 47. higher pricing strategies, since there are no result from leading the field in certain competences,competitors offering a similar product. Despite the such as technological know-how, design skills orlower demand for higher priced products, this market understanding. The point is to develop theseposition is often very profitable. competences further and to excel in them, so that you can create unique products time and again.A unique product always has a significant, not easilycopied advantage when compared to competing Collaboration is an important means of ensuring thatproducts. So this is not about a coffeemaker in a new you have the right competences and knowledge in-colour, a camera with a few more megapixels, or a house. An example of a unique product as a result ofmid-range car with a slightly different design. This is a collaboration is the Senseo coffeemaker. Theabout more than just differentiation. Being different Nespresso coffeemaker had been around since 1986,is not good enough; the point is to be exceptional. but it never became a widely used product, partly due to its pricing of 200-plus euros. Precisely becauseExamples of a unique product are the Nespresso the Senseo was positioned in the lower price range ofcoffeemaker, a Harley Davidson, Viagra, music by 59 euros upon introduction, it became a uniqueElton John or the „beyond first class‟ private cabins in product in a wholly different market, namely that ofthe latest aircraft operated by Singapore Airlines. To the regular coffeemakers.imitate such products would require the righttechnology, patents, extreme creative efforts, and/or There are basically two forms of alliances that canhuge investments. result in a unique product: joint R&D and technology licensing. In the first case, different competencesMany unique products are therefore protected in one from the two partner firms are brought together, andway or another by intellectual property rights: the risk primarily pertains to the actual developmentpatents for technology, copyright for books and process. For technology licensing, the firms concludemusic, drawing and model rights for design. These agreements about the use of existing intellectualproperty rights ensure that competitors cannot copy property rights. The two forms are discussed below.the product and enjoy the advantage of not havingsuffered the development costs. Naturally, having a unique product does not mean you can dispense with all kinds of marketingA unique product will not remain unique for ever. communication. Collaborating with a number of goodDespite the protection of a technology or model, new distributors is essential, and they will need to betechnologies can be developed that offer the same or persuaded of the utility and uniqueness of thesimilar functionality. Patents expire and music product in question.becomes outdated. Changing needs amongconsumers and businesses, or new legislation, can Findability on the Internet is also vitally important. Acause a products popularity to decline. good example here is the Checkout cashier system developed by the Amsterdam-based company Sofa.The point is therefore to run your organisation in such This is a software application for Apple computers,a way that it does not produce a one-off unique developed out of frustration about the sluggishnessproduct, but that you can constantly come up with and lack of user-friendliness of traditional checkoutimprovements and innovations. A unique product can systems. 45
  • 48. When Sofa put the Checkout test version online, they course of the development process, for example noticed through the discussions on Internet forums because just 1 of the partners stand to gain where most interest was to be found: among smaller commercial benefit from a research result. starting-up shops with just a few cashiers. In less than 2.5 years since then, some 3500 shops have It has been studied to a slight extent how this process purchases a license, 95% of them outside the can best be managed. For innovative ICT services, the Netherlands23. Unique products, once they acquire Freeband Business Blueprint Method 25 has been some degree of name recognition, are therefore developed, which can seemingly be applied to other picked out and promoted by the market itself. But for fields as well. It involves a process in which this, search engines and Internet forums are information is added gradually (see Figure 21). In the essential. first step, a business model is sketched in rough outline using a number of basic questions about the service concept, the technological architecture, the Joint R&D organisation and the financial arrangements. This first step can be seen as a Quick Scan.A fantastic book about In an R&D alliance, product development orcustomer oriented innovation can be achieved if both parties have Phase 2development is “What something to learn from each other. The more Phase 3Customers Want” of knowledge the firms share, the greater the chance of Acceptable distribution of tasks Partner selectionAnthony Ulwick. The idea achieving success, but if there are no clear Network orchestrationof joint development can arrangements in place with respect to sharing the Acceptable profit modeloffer an extra dimension revenue, the greater, also, the chance that your Value for service providers Outsourcingto his approach. partner will forge ahead on his own. This is Joint network strategy Service provisioning and processes Viability particularly true for the initial explorative phase in business model Clear definition of Version management the collaboration, and less so during the subsequent the target group Customer value phase of marketing the invention or innovation. Appealing value Branding proposition Trust An R&D alliance implies an interaction between: Quality of the provisioning system Personalisation  the structure of the alliance: this structure Critical success factors Critical design factors should offer both a partnership form to share knowledge, but also protect against the Figure 21. Freeband business blueprint method partners opportunistic behaviour, and In the second step, the rough sketch is evaluated in  the breakthrough or innovation that is either the light of six critical success factors. The third step is sought or found: which of the parties stands to devoted to the further refinement and detailing of benefit most, and who has the greatest the business model, with reference to critical design influence on its successful marketing? factors. Some of these factors, such as staffing and network orchestration, may require some more The unpredictability of what the research will achieve explanation in branches outside ICT. demands a lot of flexibility from the partners 24. Often, the business model needs to be modified during the 46
  • 49. Nevertheless, it remains difficult to determine the elaborate the ideas in new start-ups. Conversely, theyvalue of a joint research project in advance, given the can buy technologies and patents from other A guideline for productunpredictability of results. Timing plays an important companies in order to achieve a shorter time-to- development can berole here, too, since an invention that is patented just market for their own new products. found on:one day earlier by a competitor can render ones own Idea- Product Marketresearch entirely worthless. On the other hand it is selection development introduction http://www.pragmaticmpossible to estimate the effort it would take to find purchasing knowledge arketing.com/pragmatic-and hire and motivate people with the same Ideas/technology from outside Products/concepts marketing-frameworkknowledge and experience as are made available by from outsidethe partner. Idea Market Products a re ommericiallyTechnology Licensing Products a re unsuccessful technically too complex Ideas a re discardedIn 2003 Henri Chesbrough introduced the concept of Selling unused knowledge„open innovation‟ in his book „Open innovation, thenew imperative for creating and profiting from Figure 22. Funnel for product development according totechnology‟26. Chesbrough builds on what is known as Chesbroughs concept of open innovationthe „funnel‟ model, in which companies start with alarge amount of ideas of which just a small selection In most cases, technology and intellectual propertyis elaborated, and an even smaller portion ultimately rights are acquired through licensing. In this form ofreaches the market (Figure 22). The ideas that are alliance, you benefit from the knowledge,not elaborated into a product remain unused, and are competences, technologies and perhaps patents ofsometimes even inaccessible to others because they another party, or instead you make such knowledgeare patented. available. Chapter 5 takes a closer look at the settlement. Idea- Product Market selection development introduction The Galapagos bio-technology firm is a typical example of open innovation. The company develops Idea biotechnology for new medicines, but is too small to process that technology into medicine and to embark Market on the costly process of getting the medicine Products a re commercially approved through clinical testing in the US and unsuccessful Products a re technically too complex Europe. So instead they sell patents and procedures Ideas a re discarded to partners such as Astra Zeneca, Eli Lilly and Janssen Pharmaceuticals. Galapagos is generally remuneratedFigure 22. Usual funnel for product development directly, and subsequently shares in the profits if a medicine makes it to the market.Chesbroughs proposal is that companies sell theirunused knowledge to other companies, thereby The price payable for a certain technology willgenerating extra income (Figure 22). They can also depend to a large extent on its direct applicability, 47
  • 50. the number of parties offering similar technology, creating a more predictable market and more and the number of potential customers. Since 2006, transparent pricing processes. This could yield an several large auctions of patents have been held that initial guideline for comparable patents. However, the attempted to bring together as many providers and vast majority of intellectual property rights are still potential customers as possible, with a view to traded privately.Contact details: SAPhttp://nl.linkedin.com/in/ SAP is best known for its Enterprise Resource Microsoft and Oracle and many niche players.erastwortel Planning and supply chain management software Traditionally clients first select the software suite, and system. In recent years the company has evolved into after that the implementation partner. However, aswww.sap.com a multi-product company, with software to support all the implementation partners have extensive kinds of business processes in all major industries. customer contacts, they can influence the software The mission is: „help companies of all sizes to run selection process as well. better‟. “A strong and growing partner ecosystem is one of the cornerstones of the company‟s strategy”, Wortel explains: “We try to influence the customers as Erast Wortel, alliance manager for SAP, explains. through a combined effort of the SAP (pre-)sales and partner sales team. One of the key goals of our “We are a real engineering company, with many alliance strategy is to create a compelling joint offer. product innovations, such as the recently introduced This joint offer should change the traditional In Memory technology by Hasso Plattner, one of the acquisition process of customers by demonstrating founders and largest shareholder of SAP. He was one that it creates more or faster value than the of the five ex-IBM engineers that started to build individual offerings of the partners and that of the software for ICI, which was the starting point of SAP. competition. Since then SAP has grown through the focus on specific industries and through our partner strategy.” For example with Accenture and Ordina we have an integrated solution for mortgage providers. This is not SAP has a global alliance organisation with a close an exclusive agreement, but we jointly approach all alignment to the local country strategy. Most effort is relevant banks. We now have some dozens of these focused on large enterprises in a parallel selling solutions If we are able to do this well we do not model. SAP sells its software products, the partner need to compete with individual software companies, does the implementation. There is no referral fee, as but only with other (mini) ecosystems that can offer the cost of implementation is in many cases at least a better joint offering.” three times the cost of the software. This gives enough incentive to the partners. The customer decides who has the lead in the implementation project. Often one of the parties is In the Netherlands, where Erast Wortel is based, asked to be the main contractor for the services. In there are around 6,000 SAP consultants. The largest the large enterprise segment SAP delivers the system integrators have around 500 consultants each. software directly The competition for SAP‟s products comes from 48
  • 51. SAP PartnerEdge is the SAP‟s umbrella Partnership On the development side, SAP has an openprogram that was originally developed for channel ecosystem allowing software partners to integratepartners (resellers) and has been extended to all their solutions with SAP, and SAP then certifies thesepartner categories such as software partners and interfaces.service partners. It consists of a tiered system withcommitments and associated benefits: Associate, One step further are the Endorsed Business SolutionsSilver, and Gold Advancement from one level to the that fill in the white spots in the portfolio. There arenext depends upon earning Value Points in two higher requirements for integration, and a sharedcategories: roadmap. SAP promotes the use of these solutions in its extensive client base; in return SAP receives a fair  Business performance and transactions – SAP percentage of the turnover. license sales to new or current customers for channel partners and SAP software sales The last category comprises Solution extensions: positively influenced by a Service partner in these are sold and supported by SAP. Examples are Large Enterprise Open Text, Adobe, Streamserve. To be able to deliver  Capability building – Submitting success stories solution extensions a company must have worldwide or technology white papers, providing customer presence, 24/7 operations and considerable support references, taking part in the SAP PartnerEdge and presales. In this case SAP receives more than half P2P Network for business collaboration, adding of the turnover. trained and certified employees, taking higher- level sales or technical exams, and more. Erast Wortel: “The revenue from these solutions is a limited part of our turnover. We have no target toService partners can specialise based on their value significantly expand it. The key of these partnershipspoint in Industries and Solutions through Vertical and is that business processes supported by SAP can beSpecial expertise Partnerships. extended with functionality of partner products and therefore provide value and better integration for our customers and help us to compete in the best way.”Creating cost advantages Shared investmentEnlarging your customer relevance or developing a In some cases scale advantages can be achieved byunique product yields durable competitive advantage. jointly investing in means of production; for example,However, alliances can also be used to achieve cost two construction companies that decide to operate aadvantages, though these are often easier to copy. In cement factory together. Alternatively, parties maythis paragraph we discuss three forms of alliances choose to merge a number of supporting activitiesthat are geared to costs: shared investment, such as administration, personnel affairs or ICT (forreciprocal hiring agreements, and unusual supplier companies with offices in a shared building).risk. 49
  • 52. It may be advantageous to enter into a production The value of collaborating in this way is usually easyalliance with one of your competitors: if it means that to calculate: the costs of investing directly and ofyou both stand to benefit from a cost advantage, this investing jointly are generally quite transparent. Thewill thrust both of you ahead of other competitors. A only hard part is to estimate the extra efficiencysingle competitor grows in tandem with you, while achieved by scale size. One should also take intothe rest are left lagging behind. This form of alliance account that joint purchasing often enables thefor example occurs in the automotive industry, since negotiation of larger discounts.setting up a production line is a very costly affair.Certainly outside the domestic market, sharingcapacity is an attractive option. For instance in the US, Reciprocal hiring agreementToyota Camrys are finished in a Subaru plant inIndiana. In a reciprocal hiring agreement, the partners share their resource pools in order to achieve a betterAnother example is the collaboration between the staffing. This may involve consultants with atwo low-cost airline carriers Air Asia and Jetstar. This particular expertise, but also installation techniciansalliance is primarily targeted at defining the new with diverse abilities. Deploying each others peoplegeneration of single aisle aircraft, as well as the joint is settled applying market-level rates, but theprocurement of these aircraft. Where the traditional collaboration gives partners the advantage of notairline alliances focus on commercial agreements and needing to keep extra people on the payroll with apassenger benefits such as loyalty programmes, this view to peak periods. This form of collaboration isalliance aims to cut costs by sharing some operational distinct from shared investing in that there are hardlyfunctions. Air Asia and Jetstar want to make sure that any costs up front, and the collaboration is easilythe new airplane types, which will be around for 40 arranged, also in terms of operational management.to 50 years, are designed in a way that fulfils their The main condition is to share information,own requirements. particularly regarding planning.Generally speaking, this type of collaboration does The value for both parties is better capacitynot carry much risk, and the important risks that do utilisation, and being able to keep fewer people onoccur can be insured against. Depending on the the payroll.settlement structure, there is a risk in the exploitationof the shared investment, yet that risk would be far A good example is the collaboration of TNT ingreater if one of the parties were to make that Germany. In Germany there are around 150 regionalinvestment on his own. The joint operational mail service providers, all working within a confinedmanagement, particularly of shared service centres, geographical region. This is a viable business model,tends to be a trickier aspect. Many managing for with a lot of local governments, banks anddirectors of shared service centres get a taste for insurance companies present, most of the mail is sentindependence and start to focus more on expanding within the region. The mail services accept all mailtheir activities than on achieving the lowest possible from their clients and use the nation-wide firmcosts for the partners. Deutsche Post for the portion destined for outside the region.50
  • 53. TNT has bundled a large number of these mail decides on the surrounding infrastructure and thusservices within a network, the Mail Alliance. This can influence the number of cars using that road. Onalliance mainly competes with Deutsche Post and has the other hand, the multiple-year contract meansthe purpose of distributing mail that has to be that the public authority has a lot less control overdelivered outside the borders of an individual region, the operation of the road, and will therefore seekto other parties within the Mail Alliance. All assurances with respect to its operationalparticipating companies work together on the basis of management.one IT system and one set of sorting rules, whichenables the „roaming‟ between the networks. The Here, too, the cost advantages of collaborating areconditions to have one‟s mail delivered in another generally easy to calculate, taking into account theregion are similar for all participants. risks associated with the dependence on the partner. The collaboration hinges on the fact that the supplier is better able to plan, organise and finance certainUnusual supplier risk activities. The specificity of these activities makes it possible to have several suppliers bid against eachContracting-out work to a supplier generally does not other in a public tender process.qualify as an alliance. It usually concerns a purchasingtransaction, with the service or product and its costs The extent to which commissioning companies arespecified beforehand. Thus, there is no question of open to the tendering of work in the form of alliancesshared risks or joint management. differs per country. When we look at the construction of infrastructure (roads, gas pipes, water purificationThere are some exceptions, however; for instance in facilities), this appear to be quite common in theoutsourcing, where the clients personnel are United Kingdom. In the Netherlands, the Ministry oftransferred. The result is that the suppliers production Finance has set up a knowledge centre about public-capacity increases, without any solid guarantees of private partnerships, and this approach is graduallyhigher sales. The collaboration is based on the becoming more familiar. In Germany theassumption that the supplier has more options of commissioning party tends to divide the work intoputting people to work than the client. The client small functional parcels, in order to contract these outtransfers a large portion of his knowledge and work at the lowest possible cost.processes to the supplier, that puts his businessoperation at some risk. He will therefore want tohave a certain measure of operational control inreturn.Public-private partnerships sometimes entail anabove-average risk for the supplier as well. Imagine,for instance, a construction company that not onlyundertakes to build a road, but also to be responsiblefor its maintenance, the financing, and its operation.This clearly creates a strong dependency on thecommissioning public authority, which for example 51
  • 54. From normal value to top value  having market dominance (e.g. Coca Colas omnipresence);  owning the customer relationship (as Dell does, as PC assembler). They also note that most companies produce standard products without any cost advantage, or even at a cost disadvantage. A number of the most powerful business models as described by Slywotzky and Morrison can be realised more successfully as a partnership than on ones own. These models are discussed below. Controlling the standard Certainly in a market (segment) that doesnt yet have any clear standards, you can develop a new standard jointly with others. Successful examples include Apple and Nike with the integration of the iPod and running shoes, and the current attempt by Chrysler with Mercedes, General Motors and BMW to develop aIn the paragraphs above we discussed three hybrid car engine.strategies for differentiation, and how various formsof alliances can contribute to competitive advantage. If a standard has been set already, it may be anBundling resources results in a new and more option to work with the party controlling thatpowerful business model. standard to develop distinctive supplementary products, such as accessories for the iPhone.In their book „The Profit Zone‟27, Adrian Slywotzky andDavid Morrison describe a number of generic sourcesof profit protection that allow a company or Controlling the value chainpartnership to durably set itself apart fromcompetitors. The main competitive advantages are To draw profit from controlling a value chain, thereidentified as: are various options:  controlling a standard (as Microsoft does with  Collaborate with a partner that owns the same Windows); scarce resources in the value chain, and to make  controlling a value chain (Intel captures the price agreements where possible and most profitable part of the computer chain with permitted. For example, two companies with its chips);52
  • 55. comparable technology decide to develop this Market dominance further and sell it together.  Collaborate with a partner that owns other If you wish to pursue market dominance, there are scarce resources, in order to control the chain several ways to go about it: together.  Collaborate with a supplier to obtain  Entering into licensing agreements, so that a alternatives for scarce resources, and help product or brand name is used in multiple ways. spread these in the market. For example, if The Disney corporation is very good at this, with process operators for the chemical industry are Donald Duck, Mowgli and many other characters hard to come by, then offer acquisition appearing in many different products. guarantees to a training institute in return for  Finding a partner with a large production plant developing a dedicated training program. or distribution network.  Collaborating with a partner that suppliesIf you are the party supplying volume to the market complementary products. The combination ofbut not earning much in the process, then make strong brands can generate additionalcompensation arrangements with links in the value purchasing power, as demonstrated for examplechain that benefit strongly from your volume; for by Karl Lagerfeld and H&M.instance with the instalment company that installsand maintains your products. This strategy characteristically entails using the channels or name recognition of the other party, whoLooking at the construction sector, we see that a generally also stands to gain from it. However, thelarge share of the costs is due to the required steel. products or brands should be compatible to form aFor steel company Corus, a subsidiary of Tata, a relevant combination for the buyer.considerable portion of its turnover derives from this,yet with on average just a slight profit margin. Theprofits are made elsewhere in the chain, by the Owning the customer relationshipdistributors and processing companies. Corusdeveloped a response to this situation with what is Owning the relationship with the customer offerstermed Ympress steel. This steel is produced such advantages as being the first to hear ofspecifically for laser cutting, requiring fewer customer wishes and developments, being able tocorrections when processing the steel further. By directly influence the customer, and being able tooffering training courses for operators of laser cutting directly promote other products. Companies that domachinery, Corus is able to penetrate the value chain not own customer relationships to any significantto a far greater extent than previously, and at the degree can opt for the following:same time gain a position from which it can advertisethe advantages of Ympress steel.  Find partners in parties that have extensive customer knowledge.  Collaborate with parties that can help build customer knowledge in a functional sense, for instance through their ample experience with 53
  • 56. CRM (customer relationship management) standardisation committees, who will formulate an systems, with distribution or with marketing. For ISO standard that defines the diameters, shapes and many food companies, collaborating with network protocols, which all manufacturers will then marketing expert Proctor & Gamble would be a apply to their products. Other industries deliberately major help. choose not to: because HP ink cartridges only work in  Collaborate with parties that can help you HP printers, HP can afford to market the printer at supply or service the customer in a flexible and very low prices, and then make a profit selling more customised manner, and so to boost your expensive cartridges. relevance for that customer.Many distribution channels have a customer Network-related profitrelationship to some degree, and can be a goodpartner here. But bear in mind the importance of The value of a network is equal to the number ofmaking agreements about exclusivity and customer users squared28. This already became clear at theownership (see Chapter 5). time of the introduction of telephone and fax. The first person to own a fax could not put it to any use; owner 2 could fax 1 other person, and by owner 10Recurrent turnover there were 45 fax connections available. With the advent of the Internet, all sorts of networks, marketRecurrent turnover, as through razor blades, printer places and user groups could emerge and growcartridges and vacuum cleaner bags, but also rapidly. Examples are sites such as YouTube, Hyvesmaintenance contracts for a variety of appliances also and LinkedIn.represent an excellent source of profit. As it can bequite challenging for a company to supply both the The business profile site LinkedIn has some 90 millioninitial product and the disposable items, this is an users, while the more informal profile site Facebookevident area for partnerships to be forged. Where it has over 400 million (as per 2010). Then there areconcerns complementary products (for instance sites such as Flickr, Myspace and Hyves, and Plaxorechargeable batteries and the recharger, paint and and Naymz for the business world. Such (business)paint brushes), agreements can be made between sites allow one to upload some sort of CV and tothe complementary suppliers to ensure that these establish network links with your relations. However,products are compatible. Although this requires users tend to engage with just one or two networks,coordination and perhaps some after-care, this can which means that not all relations can be reached.constitute an important and distinctive salesargument. If two or more parties bundle their customers or connections in a new network concept, theLittle beats the pleasure of knowing for sure that two immediate result is a much wider reach of relationscomponents will work together; for example that a for the customer. This increases the value of thedrill bit will fit your electric drill, a DVD will play in network, but can cause a loss of Internet traffic andyour DVD player, and that your Samsung hard disk hence of advertising revenue for certain providers.will interface with your Dell computer. Many of such The impact will be less for larger, more establishedpotential problems are solved by international players than for newcomers.54
  • 57. PhilipsPhilips is one of the worlds largest corporations in Philips has a structured process to develop itshealthcare, lifestyle and lighting, integrating partnerships, that consists of an extended set of toolstechnologies and design into products and solutions. and methodologies. The process instils discipline, Contact details:With the brand promise of “sense and simplicity”, professionalism and it allows to capture learning,Philips has created entirely new product categories, best practices. http://sg.linkedin.com/pub/often in collaboration with other brands. Ivo Rutten, ivo-rutten/1/a7/4b0Vice-President for Strategy and Alliances, explains the The first phase is a strategy review. The Philipssix-phase process that Philips uses for forging and business units each have their business plan, which in www.philips.commanaging an alliance. some cases requires teaming up with outside parties in order to be executable. The more the company“Our corporate strategy, and the consistent business changes and wishes to focus on new and adjacentstrategies underneath it, drive our alliance strategy. fields, the more evident the need for partners thatWe like to create new collaborative solutions, as augment our own company skills becomes. This isthese often solve user needs in a better way and also very much the case for Philips, which has been goingare harder to copy for competition than pure product through a change from a high-volume electronicsmodifications. This entry barrier works better if we strategy in the past, to a Health and Wellbeingbuild an alliance cross-industry, with a partner active strategy nowadays. The review of a business strategyin another field, than within one industry. Sustainable with special attention for partnership needs helps toalliances are hard enough to form and sustain within identify the agenda for alliance formation and foran industry, but to copy a cross-industry one is really merger & acquisition activity. Whether an alliance ordifficult for competitors. an acquisition is preferred depends on many criteria, but an alliance can be a good alternative if anPhilips also has in-industry collaborations, though. acquisition is not desired or not feasible. Conversely,The company is now relatively asset-light, and owns an alliance can be the „engagement‟ that precedes amuch fewer factories than it did in the past. If we later „marriage‟.have the opportunity to produce a new product withanother party, then this is often the preferred option. The second phase consists of compiling a “long list”This sort of collaboration may be more or less purely of potential partners. For each potential partner, thecommercial, or take the shape of an “in-industry fit is gauged along a number of axes, such as thealliance”, e.g. where development of the producing technology fit, the cultural fit and the brand fit, etc..partner‟s production technology and of Philipsproduct technology are actively aligned for the sake Also the network compatibility is tested: in whichof improved innovative progress. If we invest in a regions is this partner active and is the company aproduct- or a production technology ourselves, then it competitor in a field outside the intendedis because we wish to retain a specific unique collaboration? Do they perhaps already collaboratetechnology, or perhaps for the benefit of vertical with a Philips competitor? To make the point in aintegration that may outweigh the disadvantages of field that is not a present Philips strategic focus: ifowning production assets in a particular situation.” Philips wanted to introduce a new laundry technology, it could aim to collaborate with, say, 55
  • 58. Samsung in Asia, or try to get in a dialog with the alliance new inventions can be made that may beBauknecht in Europe. The two possible partners owned by one or both companies). Developmentwould give access to different geographies (and that plans and implementation plans are drawn up, andwould have to line up with the Philips strategy), but most importantly: a structure of the collaboration isalso a collaboration with Samsung would be affected designed: what form does the business of the allianceby the fact that Samsung and Philips are competitors take? Who does what, how does the money flow?in the field of televisions. The latter would makecollaboration less natural and less easy, perhaps. Ivo Rutten: “A contractual alliance tends to be more difficult to arrange than a joint venture. With a jointIn the third phase the long list is tested against a venture you create a legal entity with a governancelarge set of criteria. This results in a shortlist of three structure, you value and bring in the assets, youto four most preferred potential alliance partners. appoint the management and the management hasNext, a “needs and contribution analysis” is to do the implementation and cope with changingperformed for each of the potential partners: what circumstances. The JV structure in itself allows fordoes this company need from Philips, and what does solving problems when they occur, because the JVPhilips have to offer, and vice versa? This assessment management has a focused incentive to solve themdetermines how a partner can be approached, with optimally, and the results of the solution in terms ofwhat kind of proposal, and is in fact also a first step profit and loss are automatically divided between thetowards preparing the negotiations of phase four. parents via the ownership structure. In an alliance this is different: all important problems need to beIn most cases one company emerges as the preferred foreseen at inception of the alliance, and eitherpartner. This company is then contacted at the solutions need to be pre-designed, or some sort ofappropriate level, and after a number of meetings reliable resolution process needs to be installed. Thatthe process is formalised to a certain extent. A non- makes setting up a JV easier and faster. On the otherdisclosure agreement is signed, a temporary hand: a JV tends to require a higher up-frontexclusivity is agreed upon, and sometimes some investment, and an exit is more complicated.consumer research, or other work to test the idea wejointly like to bring to market, is conducted. Take our alliance with Future Lighting Solutions. They are our exclusive distributor of high-power LEDs, andThe letter of intent covering these items is signed by we recently expanded that collaboration to enablesenior representatives of both companies, and a them to also sell higher-level products (such asgovernance structure is created. In most cases there modules incorporating LEDs and other electronics).is contact at CEO level, there is a steering committee We made certain tools and IP available to FLS, andconsisting of business managers and some staff gave them other means to be more successful in thisfunctions such as marketing, and both sides appoint venture. We did this because the lighting market isan alliance manager. very localized and fragmented, and working with FLS builds on using their widespread infrastructure. FutureThe fourth phase is all about forging the actual Lighting Solutions addresses the spread out smalleralliance. This involves checking the situation around customers in this partnership, the ones that would beintellectual property rights and agreeing on how to hard to serve for Philips. FLS benefits from thedeal with these (note that sometimes as a result of collaboration by becoming able to serve their target56
  • 59. group even better, with a wider portfolio of products When partners act in different industries, they maythat can also contribute to simplifying how customers have different business dynamics. Electricaldeal with the IP-related issues associated with these appliances are generally bought for multiple-yearhighly innovative products. use, so the market penetration of a new product tends to proceed relatively slowly. In the foodThis sounds like a good collaboration, but a problem industry and personal care, on the other hand, amay occur when a smaller customer gets developed product needs to be successful within a few months,so well by FLS, that it becomes bigger and wants to if not weeks, or otherwise the supermarkets will takebe served directly by Philips...or maybe Philips prefers it off their shelves. It is easy to imagine what ato serve them directly. Of course, the decision challenge it is to build up a big enough installed basebetween being served by FLS or Philips lies ultimately of the appliances (such as Senseo coffee machines),with the customer, whose choice is always respected, while at the same time introducing the correspondinghowever unless such an topic is foreseen and a the consumable (the coffee pad) to the supermarkets andappropriate procedure for handling it has been make it interesting for them to keep it on the shelvesagreed with the partner, such a situation may until the installed base of appliances is big enough tobecome a demotivator for the partner, and a generate large and sustained demand!landmine under the alliance. You have to pinpointsuch cases in advance and devise a solution that is Would the concept of a virtual alliance work here asbeneficial for both.” well, or is such cross-subsidy limited to one-company solutions? Ivo Rutten: “If you share costs andIn alliances devoted to product development, Philips revenues but do not bring the assets into the alliance,sets out milestones together with the partner. At it is always difficult to determine the proper cost foreach of these milestones the partners have the certain non-tangible efforts, for example the salesoption of quitting the alliance or investing further. In effort. If we were to say that our cost of sales for acase one of the partners chooses to throw in the certain product amount to 20%, then you need opentowel, an arrangement should be in place regarding book calculations to show your partner that this isthe intellectual property that has been created. Who really the case. And even if he believes you, he canis allowed to use it and for what purposes? If one disagree with you about the way you organise yourpartner wants to sell it, then the other could for sales or award bonuses. This is a complication when itexample have the right of first refusal. And what to comes to determining how much profit each partnerdo with intellectual property rights that have been made, and how to split it fairly between the partners.contributed by one of the partners, and that the other Generally it is wise to find an as-simple-as-possibleone still needs after the alliance has been broken up? mechanism that needs no complex bookkeeping,During the alliance license agreements were in place even if that simple approach is perhaps a little coarseto enable such use, and an arrangement has to be or not entirely fair: better simple and pragmatic thanmade –beforehand- that organizes the situation complex and a potential source of conflict.should a break-up occur (e.g. a right to license of(some of) the IP, at some pre-agreed or market Sharing profits however, is of course the eventualcompatible fee, or perhaps a cross license). driver for the alliance. Without that most alliances would not materialize. Besides sharing profit an Alliance may also be built on sharing risk, however. 57
  • 60. It might be a solution for those cases where one because one partner wants to quit. It can also meanparty has to invest in advance and the other partner negotiating a new contract for new investments.bears fewer risks, or his risks evolve later in theventure. In such a case the investments can be An important motivation for an alliance, and othershared to equalize the partners‟ risk profiles. Note, than directly financial, can be an intention to alter thehowever, that when both parties have invested (one brand positioning. In such cases clear co-branding iswould have anyway, and the other has chipped in an most attractive. For example when Philips andearly contribution), the situation could turn ugly if Swarovski introduced their crystal-inlaid thumbafter that first investment somehow the alliance drives. This was a well-considered aspect: Philipsbreaks up: another example of having to foresee this liked its brand to be associated with with Swarovki‟sscenario and devise good resolution mechanisms in luxury „Lifestyle‟ image, and Swarovki was interestedthe agreements.” to attract a younger clientele with products for successful businesswomen. The products wereTo return to the six phases used by Philips: the fifth marketed as „Active Crystals‟, with clear signaturephase is the ongoing management of the alliance. brands of Philips and Swarowski.Products are developed, production capacity isarranged, the market introduction is completed and In the case of the Senseo coffeemaker, a totally newcontinued innovation is jointly applied. At the brand was created. The motivation was that theoperational level, the partnership is managed by the partners preferred not to have their respective brandsalliance managers from both sides. At a more tactical associated with each other‟s markets. Philipslevel there is a steering committee. Finally, there are remained an appliance brand, and Douwe Egberts aexecutive sponsors on both sides. “Three levels, leader in coffee. The joint proposition was calledbecause we have learned that is needed to keep the neither Philips not Douwe Egberts, but „Senseo‟. Inalliance alive if one of them is temporarily out-of- the case of the Coolskin alliance with Nivea, the jointoperation, as happens regularly when staff changes brand was communicated less strongly. Here Philipsof something else temporarily disrupts the three-tier was interested in entering the market segment ofconnection at one of the levels”. electric wet shaving and Nivea was keen to be associated with personal care for men.The Philips alliance team provides support using anumber of tools. There is a separate checklist for Ivo Rutten concludes: “These alliances have createdwhen the alliance is 100 days old, to check whether completely new product categories and establishedthe implementation is complete and if the design of our name in it. This has thrown up an entry barrier forthe business collaboration is fully functional. And the competitors of Philips and its partners. Not onlythere are regular health checks, measuring on softer would they have to develop a similar productissues such as the perceived balance of power in the proposition, but they would have to forge an alliancealliance. If results deteriorate, action is taken. with another strong brand as well. Both are difficult, and the latter more so, especially if a pair of leadersThe sixth phase is restructuring the alliance. This has already „stolen the show‟. This is how our effortcould mean dissolving the alliance because its agreed in creating and managing alliances pays off.”lifetime is over, circumstances have changed or58
  • 61. Value of participating in a network collaboration turns out to restrict one anothers possibilities. In 2006, a number of Dutch companies active in the field of electronics, optical equipment, injection molding and metal working decided to start collaborating under the name of Mechatronics Partners. All are relatively small in size and turnover, but together they have around 600 employees, of which 100 engineers in the field of designing, engineering and constructing electronic equipment like DVD players, control cabinets and industrial machines. The basic rules for the partnership were set out on just three sheets of paper:  Every company does acquisition through its own network. Joint sales and marketing activities are paid together.  Every month representatives from the companies sit together to discuss the market opportunities and to decide in whichThe preceding paragraphs basically assumed a combination a bid will be made. Eachcollaboration between two companies, with a view to participating company will calculate its costwhat this may be worth. Analogously, we can price, and the margin is decided jointly. Externalexamine the value for a company of participating in a quotations are used to monitor thenetwork. In a network, multiple parties collaborate competitiveness of the prices.and have more complex relations than in two-party  In case of a successful bid, one of thealliances. The profit made by the company through companies will provide a project leader, whothe network should be compared against the profit coordinates the joint efforts and is contactthat it would make on its own. person for the customer.One reason to collaborate with others in a network is The expected extra turnover for 2009 as a result ofthe expectation that the participating companies can this team approach was between 3 and 4 millioncomplement each other, for instance in research and dollars, which is relatively small on a total jointproduct development, or in production or reaching turnover of around 100 million, but most of it iscustomers. This synergy should ensure that the profit annually recurrent revenue. Apart from that, theof the network exceeds the sum of individual profits. sharing of contacts and market information hasAt times a network can achieve negative results for helped the individual companies expand their ownthe participants, for example because the activities. 59
  • 62. In practice it appears that participating in a network is Synergy factormainly advantageous for companies that arerelatively small in their market or industry, and thus Area in which A networkbenefit from the advantages of scale or scope offered participation isby collaboration. Three factors cause certain beneficialcompanies to be less inclined to enter into alliances: Neutral 1  Being a market leader: this provides sufficient (no synergy) scale size in itself. Profit equal to  Having a technological head start: this is a operating condition for supplying distinctive products. Area in which network independently  Being a supplier to a limited number of large participation is detrimental customers: this diminishes the need for B distribution partners and customer knowledge. 0 1 Negotiating Neutral power factorAside from the absolute profit achieved by the (no extra negotiating power)network, a significant issue is the share that each ofthe participating companies will receive. The size of Figure 24. Benefit of operating in a network based onthis share will often be a matter for negotiation, with synergy and negotiation powera view to what each partner contributes. The moreessential a partners contribution in achieving In Figure 24, Company A might contribute a smallsynergy, the greater its negotiating power to claim a component of a compound product and thus notlarger a share of the added revenue. wield much negotiating power in the network, but the network is sufficiently effective for A to benefitTaking into account synergy and negotiating power, from participating, rather than to operate on its own.the profit that a company can make in a network can Company B might be a relatively large player thatbe expressed in a formula29: shares his production capacity with others, and has therefore succeeded in Company‟s profit Company‟s Synergy Negotiating negotiating a in a network = individual profit × factor × power factor disproportionally large share of the networksThe possible outcomes of this formula are given in profit. However, since they are all part of a network,Figure 24. With a synergy factor of 1 (neutral) and a the individual companies are less committed tonegotiating power factor of 1 (equivalent), acting in a marketing efforts. For that reason, it would betternetwork yields a profit equal to what the company serve Company B to leave the network.would make independently. At the upper right of thecurve, network participation is attractive (a lot ofsynergy and/or negotiating power), at the lower leftit is not.60
  • 63. Participating in a network also entails certain risks: Just as you will evaluate your potential partners, they will evaluate you against the others. The two things  Loss of control: the core of any partnership or that you can influence in this process are: alliance is sharing the control over activities undertaken in collaboration. Although that  your own attractiveness, for example by control may initially work fine, as more parties investing in innovative solutions join in this is something to watch closely.  your contacts in the market, to enhance your  Networks may start to lead a life of their own, visibility for others and to get more information. for instance because the participants get to know each other and may launch new As soon as you have identified your „perfect‟ partner initiatives. you must aim for exclusivity. But often everyone  The distribution of revenue may take a turn for waits to play his cards up to the last possible the worse for a particular company. For example moment. A careful partner selection that starts even when one company sell a machine and the before the project is announced can help to make the other companies sell the consumables, and the added value of a specific network clear. sales of one consumables is less than expected. In joint ventures this drawback is shared with Making a good offer is a complex process, especially the other parties, in the event of licensing it if you want to combine skills from multiple distinct depends on the actual agreements whether this companies. A tight timeframe with some slack is is compensated. important, as it wouldn‟t be the first time that one of the parties backs out just before submitting the offer.In all cases, it is important to carefully consider To agree on exclusivity is one, but you can‟t force thewhether to join a network. other party to sign the offer. So make sure you have time for a backup plan.Another case is when you see a project in the marketand it makes sense to bid with a networks of The advantage of participating in a network is havingpartners. additional opportunities in terms of turnover and profit, but the disadvantage is the loss of control. OneObviously there are multiple players in the market. of the best methods to increase your own influence isSome partners offer a better chance of winning the to limit the number of partners. This implies that, fordeal than others. Differences can exist in the each further partner, the benefit of admission to therelationship with the client, in technology, and even network needs to be weighed against the loss ofin experience with selling a combined offer. influence. When setting up a network it can therefore be a good strategy to choose a partner who isLast but not least: the potential to make a profit can perhaps not the best there is, but who is able todiffer per partner. What are their project contribute two or more different essential disciplines.management capabilities? Do they have experiencewith working with a partner? And how tough will you Being the one to initiate a network would seem to behave to negotiate for your share of the profit? Your an effective way of maximising control over thatpartner may even be cheating on you and leave you network. Recent research using games theorywith nothing. supports that assumption30. Suppose that it would 61
  • 64. make sense for Company A to form a network with Still, it appears that this does not always apply. Astwo other parties (B and C), and that there two soon as Cs ideal position approximates theimportant negotiating factors, namely the distribution compromise between A and B (point 1), then it isof profit and the number of board members to be advantageous to become involved at a later stage.appointed per party. A now has the options of: This also makes sense intuitively: in order to get C on board, A and B can make concessions relatively easily  concluding an agreement with one of the while still remaining clearly within their negotiating parties, and then to invite the third party to join; room.  to enter negotiations with both parties at once;  to wait to be asked by B and C jointly. It is often less worthwhile for a market leader to join a network, certainly if this party is technologicallyFigure 25 schematically represents the negotiating ahead of the rest. Suppose that a leading company asprocess. Points A, B and C indicate the ideal outcomes TomTom were to join a network of navigationfor each of the parties in terms of the two equipment providers working together to improvenegotiating factors (plotted horizontally and the availability of road network information. TomTomvertically). The circles indicate their negotiating room. would then immediately lose the advantage ofIf A and B first negotiate together, they will arrive at having its own Internet platform to report roadpoint 1. If they then involve C, negotiations start from situation changes. Moreover, as a late entrant itthis point and end up at point 2. If all parties start would not have much extra negotiating power, andnegotiating from the start, equilibrium is reached at thus not obtain a larger share of the profit.point 3. This is more advantageous for C than point 2.Therefore, it is to A and Bs advantage to take theinitiative. First A and B, then C A, B and C simultaneously A A 2 3 1 C C B BFigure 25. Different order of events in forming anetwork between companies A, B and C62
  • 65. 4. Distribution of value fairly obvious, for example in a distribution agreement one of the partners is responsible for the product and the other for the sales. Yet even in this example, it is important to establish who is responsible for market information, for technical sales support, and for marketing communication. It may be that each partners contribution depends on what part of the portfolio is commercially most successful, or on the setbacks that are encountered. Each partners contribution can then be arranged per situation. In any case it should be avoided that the collaboration implies obligations for just one of the partners. Sharing the costs Many of the costs involved in a partnership bear a direct relationship to the revenue and can thus beThe previous chapters dealt with ways to create compensated in that way. However, particularly atvalue. In case this works better through an alliance, the start of the collaboration there will beor this is the only way to obtain specific resources, (investment) costs that are not immediatelythis extra value needs to be split among the partners. counterbalanced by income. Agreements willThis chapter revisits the ten alliance forms that were therefore need to be made:introduced at the end of Chapter 2. After somegeneral considerations, for each of these forms the  Does each company bear its own costs untilpossible distribution of revenue and costs is revenue starts flowing in?discussed, along with the consequences for each  Are the costs shared proportionally or accordingparty‟s behaviour. to a certain key?  Are costs incurred compensated as soon as money is available, or do made investment costs (and thus risk-taking) correspond to aGeneral share of the profit?  Costs can also be distinguished according toIn any collaboration, it should be clear where each of type: for example, sales and development coststhe partners responsibilities lie. This is sometimes are not shared, investments in materials are. 63
  • 66. Disputes often arises as to the allocation of  What if the revenue is substantially higher than costs. It is advisable for that reason to agree on expected? Will you still be content with this tariffs and cost allocation rules ahead of time. agreement?  What if it disappoints? Who will be the first to Many smaller partnerships, for instance when two forego income? Does that feel right? companies decide to make a collaborative offer in a  Suppose your partner is ill-meaning and will public tendering process, operate on the principle of even disregard his own interests: how can you minimum cost settlement. In making the offer, the respond and how can you protect against that? partners each bear their own costs. Then, if a joint  How does it work if one of the parties wants to venture agreement is concluded, the leading party quit the partnership? can have its efforts compensated in the form of a fixed sum or a percentage. Such an agreement Aside from the immediate financial returns, a means dispensing with the trouble of checking the partnership can also offer other benefits. These could efficiency and accuracy of costs reported by the include: partner.  access to new customers or an improved relationship with existing ones; or a greater Sharing the revenue name recognition;  access to new market information or databases, Where it concerns direct financial returns, it is or the acquisition of new copyrights; important to share these as much as possible  a stronger purchasing position thanks to larger proportionate to each partners contribution. Chapter purchasing volumes or a leading position in the 3 described how each type of contribution, such as market. people, production facilities, patents or financing, can be compensated. This is a matter of negotiation andAfter you have selected a partner, These benefits can often be utilised directly by one of of calculating the various options. What will happen,arrangements have to be made, for the parties. Although they may fall outside the scope for instance, if a joint project disappoints and there isexample about the division of costs of collaboration, they are nevertheless related to it. If no money to fully compensate each partnersand revenues. Alliance experts knows such benefits are distributed very unevenly, this may contribution?all business models and guides you be accounted for in the distribution model.quickly and for a fixed price towards For all distribution mechanisms, the followingoutlines for an contractual agreement. The agreements made about the settlement of costs questions apply:Please visit and revenue will affect the behaviour that each ofwww.allianceexperts.com/toolkits the partners demonstrates within the collaboration.  Has its application been described clearly and This certainly applies where businesses are involved, unambiguously? where the profit motive tends to be the principal  Can all input variables, such as hours worked, be concern. For each of the ten basic forms of alliances, properly measured and monitored? the commonly applied settlement models are discussed below along with the variable options. 64
  • 67. Imtech Contact details:Imtech ICT is a subsidiary of Imtech, a European relationship system. As this discount is only given totechnical services provider in the fields of electrical the first, we can use this extra discount for extraengineering, mechanical engineering and ICT. Imtech, margin or to lower our price to secure the deal http://nl.linkedin.com/in/pascalrijswith almost 25,000 employees, achieves an annual (usually a mix of both). Cisco furthermore hasturnover of over 4.3 billion euros. As part of the ICT technology migration programmes for the exchange www.imtech.nl/csdivision Imtech ICT Communication Solutions focuses of equipment or discounts for new technologies, andon supplying communication solutions for Cisco funds part of our business developmentorganisations with 250 to 5000 employees; mainly programmes.”government ministries and agencies, educationalinstitutions, utilities, industry and service providers. In Every year Imtech and Cisco make a joint plan withthe majority of cases Imtech relies on Cisco revenue targets, goals, strategies per goal, atechnology, making Cisco an important partner. communication plan, and a set of „conditions of satisfaction‟. These are „softer‟ performance indicatorsAs do many other equipment and software vendors, like lead sharing, knowledge development, jointCisco has an extensive partner programme with marketing and the perceived profitability of theaudits on service delivery and product alliance. A Channel Account Manager from Ciscoimplementation. Pascal Rijs, Alliance Manager with works at the Imtech office two days a week and hasImtech ICT, describes his experiences with this a Cisco incentive on revenue with Imtech.approach. “Cisco helps us with new productdevelopment, combined marketing, and business The parties collaborate on long-term opportunities asdevelopment. On the support services side, we prefer well. Pascal Rijs: “Imtech is involved in thethe model of joint service delivery: we take care of development of smart grids: networks for thethe first, second and even third line service calls, and efficient distribution of energy from for examplein return we get a discount on the service fee. wind-energy parks to office buildings. Here we work with Accenture, IBM, Cisco, General Electric and ABB.The partnership with Cisco requires a lot in terms of Cisco provides specific network components fortraining, processes and communication, so it should substations, for example. Together with them wedeliver good value for us as well. The most important have enough volume to design a grid for a wholecomponent is price differentiation. Cisco has a large town.market share, supported by a strong local presence.The number of opportunities is in line with the These kinds of collaborations fit within a trend.number of Cisco partners in the Dutch market; as such Instead of products, we will increasingly be sellingthat there is enough profitable business for everyone. solutions. Therefore we need others. In this case Accenture comes with the concept, IBM with theWe can receive an extra discount if we are the first to software, and together with Cisco we take care of theregister an opportunity in the Cisco customer infrastructure layer.” 65
  • 68. Distribution agreement profit. Where it concerns services, or products with a service component, there may be a direct contract relationship between the supplier and the buyer, for instance when selling insurances or supplying photocopier equipment on the basis of a certain price per print. In such cases, the distributors reward is paid retroactively by the supplier. There are different methods to determine that reward:  A fixed sum per type of product  A fixed percentage of the turnover  A percentage of the difference between the sales price and a purchasing price to be determined by the supplier  Or a combination of the methods above. To the extent that the reward is more related to the sales price, operations will lean more towards the margin than the turnover. This can tempt a distributor to neglect less lucrative sales opportunities. For a supplier this may mean a decline in his market shareIn many cases, a distribution agreement contains a or production capacity utilisation. That is why areward in the form of margin that the distributor can reward as a percentage of the turnover can beachieve on reselling the product. In the simplest effective. However, if this takes the form of a fixedscenario the distributor works with a fixed purchasing commission per product, a minimum sales price willand fixed sales price, but there are several variants. need to be set.In most cases, the distributor is free to determine the In other cases, the supplier will pursue some sort ofsales price. In Europe and the US this is often even a policy in determining the purchasing price. This couldstatutory requirement in order to prevent cartel be by offering volume discounts per order, byformation; local exceptions are books, cars or introducing purchasing discounts depending on themedicine. This allows the distributor to determine a annual volume, or by introducing a bonus schemepremium price depending on his marketing, sales that accumulates benefits with each individual sale.efforts or distribution, or to offer discounts under In a network of comparable distributors, anothercertain conditions. This is the optimum mechanism option is to introduce a competitive element: the bestfrom the perspective of value enhancement. selling distributor is entitled to a sum of money or some prize like a holiday trip.In the sale of products, the difference betweenpurchase and sales price will define the distributors66
  • 69. In a number of industries such as IT, the large and The Oracle Partner Network consists of threelengthy sales processes make it customary to offer membership levels -- Silver, Gold and Platinum -- thatadditional discounts on the purchasing price to the are each associated with different demands anddistributor that first discovers and registers a sales different annual contributions. Partners are supportedopportunity in the suppliers administrative system. in different aspects, including an unlimited number ofThis allows supplier and distributor to respond more demonstration licences or development licences,effectively to an opportunity, for instance by access to knowledge databases, and certain forms ofapproaching the buyer even before he issues a technical support. Partners may use the Oracle logoRequest for Proposal. This discount, which is for that and can specialise in certain competences.one distributor exclusively, enables him to reduce hisprice even further and so to increase his chance of Partners can move up through the membership levelswinning the order, or to better maintain his own based on their development of certain competencesmargin. With Oracle, for example, this discount is 5% to a certain level, the number of successfulbut only applies if the order is confirmed within six implementations, and the number of leadsmonths after registration. contributed. The amount of technical and marketing support increases accordingly, as does the discountA number of preconditions need to be observed for offered when purchasing licences.these types of price structures to work properly: Oracle collaborates with partners/distributors  The price structure must be established according to two models: beforehand and be entirely transparent.  Differences between distributors may occur, but  Reselling: the turnover is recorded in the they need to be objectifiable: it is fine for a partners bookkeeping certain distributor to obtain an additional  Co-selling: the partner advises but does not sell discount for a large volume or on account of a licences, which need to be purchased directly specific agreement, but then this should, in from Oracle. principle, be attainable for other distributors.  Any channel conflicts must be tended to: it Oracle applies an „open market model‟: all should not be possible to obtain a greater distribution channels are given the same discount on discount via a longer or different channel, on the standard price list. A distributor gets a 30% to the basis of certain agreements, then when 40% discount, depending on the turnover. Higher making the purchase as directly as possible discounts may be offered if Oracle is directly involved from the supplier. The supplier should carefully in a deal, but the principle remains that partners define the application of any exceptional need to achieve a margin of at least 5% on the resale arrangements. of licences.A good example is how Oracle operates. As one of When a customer buys Oracle licences, he is given anthe largest software suppliers worldwide (and also of Unlimited Licence Agreement, including the right tohardware, since its takeover of Sun), Oracle has upgrades and support. The discount applies to thedeveloped an elaborate policy that is, for the most entire package, in terms of the purchase as well aspart, open to examination by third parties. support. Support is always 22% of the purchasing 67
  • 70. price per year, and is billed directly by Oracle from instance by providing in-store displays, the design ofthe 2nd year on. This has no bearing on partners the packaging, or by offering samples or trialreward. versions.Oracle supports partners with its own university for Investing in training materials can be useful,the training and reschooling of new consultants. A particularly where more complex products arepartners loyalty may be increased by investing in involved. The supplier usually assumes that thetraining and marketing. Every alliance plan is distributor has all the knowledge and skills requiredsupported by an Enable Plan, which provides KPIs to sell the product; yet often enough the distributorthat are reflected in the reward structure for alliance even lacks commercial skills, let alone technical skills.managers, for example the number of trainings and Or perhaps the entrepreneur is sufficiently capable,of certified consultants per partner. There is even an but is assisted by employees that are just startingHRM programme for partners: for 2000 dollars, Oracle out. Good training materials, perhaps even videos towill recruit and train new consultants for partners. demonstrate how to sell a certain product, canFinally, Oracle strives to get ex-employees assigned significantly boost sales figures.to marketing posts at its partners. Non-financial factors are particularly relevant forMore in general, a distributor will be inclined to sell distribution across a number of different links: here,those products or services that yield the largest the margin between the suppliers sales price and thereward proportionate to his sales efforts. This makes sales prices for the end user is stretched across theincreasing the reward an important method, but various links. Although the supplier can set the pricethere are also a large number of non-financial for the supply to the first distributor/wholesaler, hemethods that can incentivise the distributor. The has no control over the price and discount structureeasier it becomes to sell a product, the more such applied further down the chain.methods will be applied, even though it means asomewhat lower financial reward. In such cases, non-financial methods such as providing promotion materials, in-store displays,Important is first of all the attractiveness of the training materials or arranging proper complaintsproduct or service. This is certainly also a matter of procedures are much more effective than loweringpackaging, the documentation and the guarantees. the sales price. Projects in which the suppliersPackaging that is easy to stack or to ship, a clear representatives talk to distributors far down the line,manual that reduces the number of customers calling just one or two steps removed from the end user, canthe distributor for help, and an effective complaints also prove more cost-effective than a discountprocessing procedure and guarantee policy, campaign. Finally, the wholesaler can be rewardedpreferably arranged without the distributors for offering information and training to retailers.involvement, can help limit the required sales effort. For example, Coca-Cola supplies its raw materials toSecond, a supplier can assist in the marketing. By bottling companies, but supports the sales throughadvertising the product it can generate a pull-effect, mass marketing campaigns targeting consumers andstimulating customer demand. Additionally, the by providing an infinite number of signs, banners andsupplier can help in terms of product-push: for vending coolers to retailers all across the world. It is68
  • 71. not without reason that Coca-Colas brand value is sustain his added value, which in most cases is basedimmense, and their product is available virtually on relatively easy to copy knowledge. This can beeverywhere. This even forced Unilever to team up done in several ways:with soft drinks giant Pepsico for its Lipton tea brand.The clear distinction between tea/ice tea and other  By sustaining a broader relationship with thesoft drinks means that the partners do not interfere customer than for this solution only. The addedwith each other, even though they share the same value of the distribution partner then lies in histarget group and distribution channels. These product portfolio and his further arrangementschannels can now be utilised jointly, which generates with this customer.a considerable cost benefit on account of the huge  By continuously bringing new one-off customersvolume. into the alliance.  With a contractual arrangement, stating that allThere are also challenges for the distributor. business of the supplier with the distributor‟sEspecially with custom-built products or with services, customer base has to be done through thethe contact between the supplier and customer distributor.cannot be avoided. After making the deal with aspecific customer, the distribution partner has toComsoft Direct Contact details:Comsoft Direct is one of the biggest large enterprise manager. In some cases Comsoft takes a partner‟sresellers of Microsoft software and, as such, a licensing consultant on its payroll, which is fairly http://nl.linkedin.com/inspecialist in licensing structures and agreements. unique for a reseller. Usually, only software providers /vincentlukkenHeadquartered in Switzerland and active in a number tend to do this.of European countries, the organisation offers www.comsoft.nlsoftware management services in addition to the Vincent Lukken, alliance manager at Comsoft, furtherlicenses sales. explains the approach: “New partners are selected with a three-month trial period, mainly to seeFor the small and medium enterprises market, whether the partner is sufficiently competitive. AllMicrosoft works with distributors that sell to a large resellers receive from Microsoft the same discount onrange of resellers. For the large enterprises market the list price for the licenses. So what part of that(up from 250 employees), Microsoft sells directly to discount does the partner have to offer to thethe customer directly, and Comsoft then receives a customer and how is the remainder split betweenfee from Microsoft. him and us?Comsoft works with a large number of commercial The next step is to conclude an agreement for sixpartners for the hardware and consultancy that months during which the partner will obtain itscomplements the software licenses. Partnerships are licenses exclusively from Comsoft. In return, partnersclassified as „managed‟ or „unmanaged‟, with demand a larger discount. In most cases a 50%-50%managed partners having their own alliance split of the margin is agreed. This can vary, as the 69
  • 72. activities to win and serve the customer lie more Finally, we can organise events for our potential with one party. This structure encourages us both to clients and promote our partners there.” concentrate on obtaining the most profitable deal. Apart from distribution partners Comsoft has alliances Some of the managed partners are actually strategic with complementing companies to make partners. In such cases, the collaboration incorporates collaborative offerings. In these cases no fees are joint activities such as newsletters and seminars. paid. One example is the collaboration with IT Sales personnel from both sides meet up to share specialist Inter Access. Inter Access will source all its opportunities. With some partners Comsoft receives a software licensing activities with Comsoft, and fee for lead generation, in case only services are sold. Comsoft will be the preferred implementation partner for Inter Access. Vincent has several ideas on how to promote partner loyalty. “First of all we have to further enhance our He sees a major challenge ahead: “As Microsoft offers reward structure with proper lead registrations and more and more solutions „through the cloud‟, the incentives. The second action is to further share need for software licenses is bound to decrease. We knowledge about customers. We receive marketing already notice it in the market. We will have to adapt funding from our vendors, and a third option is to both our business model and our partnerships to apply that money in consultation with our partners. these changing circumstances.” Franchising  He is better able to spread his investments in the concept. Franchising is an important growth strategy for many  Marketing communication generally becomesA short presentation with some more effective since there are more sales organisations, particularly in retail. Franchising canaverage figures for initial outlets. also be applied in the business-to-business market toinvestments in the UK can be found expedite the sale of products or technology. In return  Scale size enables him to negotiate betteron: http://tinyurl.com/5opbus for the brand name, the service concept and often purchasing conditions. the purchase of products, franchisees pay a fixed sum or a percentage of the turnover. This often concerns Additionally, it is a way of establishing a brand name long-lasting contracts in which the franchisor and that requires few extra own investments. franchisee clearly depend on each other. Nevertheless, the value of the franchise format is For a franchisor it is often important to grow rapidly somewhat doubtful. Many franchise formulas collapse through the number of franchisees, as this yields cost relatively soon because the concept is not embraced benefits in three respects: by consumers, or even because it proves impossible to find sufficient franchisees. 70
  • 73. To determine how attractive a franchising formula is Where it concerns an established franchise formula,for the franchisees, three cost components are the costs for a franchisor usually concern theimportant: consultations and part of the shop furnishing. The major investments have been made before, and the  the size of initial investments to set up a shop most important risks have been taken. At bottom, he or sales office; is the party that stands to gain most from the  the size of the monthly payment in return for negotiations. using the formula;  the margin obtainable through sales, based on purchasing costs and freedom to set prices. Aligning propositions and referralPioneering franchisors will need to keep the Where two companies align their propositions andfranchisees initial investments low and possibly refer to each other, this will generally not see muchrefrain from asking a one-off compensation. This in the way of cost settlement. In most cases bothreduces the starting-up risks for the franchisee. This parties bear their own costs for the alignment andrisk will also seem less if the franchisor agrees to possible product or service modifications. Aside fromshare in the investment; this will have a positive that, the expenses of joint marketing campaigns mayimpact on the formulas growth rate. be shared; see also the paragraph about co-branding.Research has shown that the size of the monthly In the services sector it is still common to work with apayment does not seem to influence the growth rate. lead fee. Simply contributing a potential client orHowever, this payment should be such that it arranging an assignment can be reason for thecombines with the profit margin of the turnover to contracting party to remunerate the contributor. For aproduce a profitable franchise. As the formula ages, single lead this may be a few percent, but for anthe pressure will increase to reduce the monthly entire sales trajectory percentages of 10 to 30% arepayment: franchisees become more experienced and customary.less dependent on the formula, for example becausethey know their customers and their needs better, Also referring Internet users through links or bannersand mutual competition increases 31. on another website, known as affiliate marketing, can be regarded as partnering; the more so ifIn many cases, the franchisee will need to finance the payment is offered for each completed saleslaunch of his or her company. The furnishing of a transaction, rather than for each „click‟ as Googlelocation, hiring and training personnel, a sub-optimal does with Adwords.staffing at first and building and maintaining stocksall cost money. These financing costs also need to beincorporated in the business case. 71
  • 74. Chuchawal Royal HaskoningContact details: The Thai-Dutch joint venture Chuchawal Royal design of a tunnel plan between Hong Kong andhttp://th.linkedin.com/in/alkoplas Haskoning was set up in the late sixties by the Macau, together with engineering consultant engineering company De Weger to supervise the Witteveen+Bos.”www.chuchawalroyalhaskoning.com design and construction of the new Bank of Thailand headquarters. To gain access to local knowledge, a The collaboration is sometimes formalised as a new US-educated Thai architect by the name of Chuchawal legal entity, and in other cases bids are made as a Pringpuangkeo was hired as an advisor. In 1974 the consortium on separate purchase orders. Chuchawal ongoing collaboration was formalised in a joint Royal Haskoning is a Thai legal entity that was active venture named Chuchawal-De Weger, and after De in other Southeast Asian countries, but these Weger was incorporated by Royal Haskoning in 1998, activities were sold to Royal Haskoning in 2002. the alliance changed name. Financial settlements are easy and transparent: only the salary costs for some expats and a management From the start the joint venture has been managed fee are invoiced by Royal Haskoning to the joint operationally by a representative of Royal Haskoning. venture. Dividends are paid out yearly. Usually the Currently this is Alko Plas, who sits on a board of costs of local representation are split by the various directors with two representatives of Chuchawal and divisions of Royal Haskoning that profit from such an a division director of Royal Haskoning. This board entity, with the country manager reporting to reports to the shareholders meeting, attended by multiple divisions. Since the alliance partner has a Chuchawal Pringpuangkeo and a board member of direct line to the board of directors, the joint venture Royal Haskoning. only reports to one division to simplify internal communications. Alko explains the strategy of Royal Haskoning: “We always start from the customers request, and then Alko Plas: “For Royal Haskoning this is the only see what kind of expertise is required to arrive at a country in the world where we have such a solution. This need not always be technical expertise: continuous joint venture with a local partner. Due to we recently won an assignment for the renovation of Thai legislation, it is the only way to have a seven bridges thanks to the fact that we also took permanent entity here. Of course you have to adapt into account the communication with the to your partner and to jointly determine your strategy municipalities involved. and operational approach.. We make our investment decisions together and hold budget rounds. What I To obtain all the necessary expertise we frequently see is that the Thai partner is more entrepreneurial collaborate with various partners. That can be either than Royal Haskoning, which is more cautious in one-off or for longer periods. With Nedeco, a bidding for projects . At the same time the joint combination of Dutch engineering agencies, we have venture gains from the long term contributions of been active in Thailand for more than 20 years and Royal Haskoning in items such as a code of conduct have, among other things, developed a large port and knowledge around sustainability.” complex. More recently we acquired an order for the 72
  • 75. Collaborative offering those of previous assignments, or with reference to competitors in the market. But often it will just be a matter of trust that partners do not add an extra margin. The second aspect concerns the legal form chosen for the offering. Does one partner act as chief contracting party, with a purchasing relationship towards the other partner or partners? This means a bigger risk for this partner; a risk that can be reduced by:  arranging that the partners are only paid after the client has paid and no further claims can be expected (back-to-back construction);  requesting a bank guarantee that can be claimed in the event of delivery problems;  requesting guarantees from a holding company or shareholder to prevent the partner from going bankrupt as a result of setbacks during the project or of liabilities afterwards. Any reduction of this risk should be reflected in a smaller compensation premium for the chiefIn collaborative offering, two or more companies will contracting party. However, percentages of 10 tooften want to supply their own part of the solution 30% are not unusual.requested by the customer, but it also requiresoverall coordination and, in many instances, the Alternatively, the offer can be made as a legalcustomer will want to deal with just one contact partnership in which both partners have an equalpoint. The latter wish is in order to prevent ending up position. If this implies limited liability for thewith a defective solution, should the separate partners/shareholders, this means restricted claimsupplies fail to integrate seamlessly. options for the client, who thus will have to consent to that.In formulating a collaborative offering, there are anumber of pricing aspects to consider. Equal collaborations without limited liability for theThe first question is what margin the businesses participating parties can have the consequence thatapply in their pricing of their own contribution to the liabilities arise for both parties, instead of for justsolution. Not all suppliers are willing to fully disclose one. One reason to opt for this may relate to fiscaltheir cost price calculations, and the extent to which facilities. In multinationals, the national organisationsoverhead, capacity utilisation and possible may choose this option because share transactions,inefficiencies are incorporated varies among where liabilities can be limited, require the headcompanies. Prices can sometimes be compared to offices permission. 73
  • 76. Finally, the actual alignment of interfaces and tasks However, each contract provision that assigns part of should be considered. The most important the risk elsewhere requires a corresponding reduction compatibilities can often be identified, such as of this premium. hardware requirements for a software system, or the maximum weight of a component for an aircraft. But Parties engaging in collaborative offering will need to who is responsible for making sure two software confer closely concerning the total sum of risk systems can be operated on a single hardware premiums and margins. The simple fact of system simultaneously, or for the weight distribution collaborating must not cause the partnership to price of an aircraft and the implications for its construction? itself out of the market. On the other hand, having a One party shall have to act as system integrator or deficit on the joint budget is as good as a guarantee quality safeguard. This, too, justifies a price premium. that tensions will arise in the companies relationship. CapgeminiContact details: With over 100,000 employees, Capgemini is one of can offer a client impartial advice. In outsourcing wehttp://nl.linkedin.com/pub/ the largest providers of consulting, technology, tend to work more with IBM, in enterprise resourcebalt-leenman/0/567/96b outsourcing, and local professional services. With the planning systems with Oracle and SAP, and in mission statement “Driving Concrete Business hardware with IBM and HP. Although, since thewww.capgemini.com Results”, the company helps customers transform takeover of Sun, Oracle is a good option as well.” their organisation and improve performance. The main activity is the implementation of hardware and The alliance owes its success to the complementary software solutions. cultures of the companies. “Oracle is very sales driven, while Capgemini understands the a Capgemini is one of Oracles most important customer‟s business challenge. The Oracle sales implementation partners. Balt Leenman, one of organisation focuses on quarterly results, Capgemini Capgeminis alliance managers, has long been is more long-term oriented. involved in this relationship. Back in 2004 he was selling Peoplesoft solutions, before it was taken over For a large client such as KPN, Oracle deploys several by Oracle. He saw the potential of this takeover, salespeople, each pursuing his or her own targets. wrote an article about it and was invited by Oracle to We wanted to implement Oracle middleware and had visit San Francisco. Since then he has been involved organised workshops with the client for that purpose, in managing this alliance. but that was frowned upon by the Oracle ERP salesman because it could influence his sales cycle. “Within Capgemini, the alliance with Oracle is seen as There lies a role for Capgemini and our alliance a role model. Oracle was recently declared „Overall management.” partner of the year‟ for the second time, beating system integrators like Accenture, Deloitte, IBM, In his opinion, a collaboration becomes effective if Logica and Ordina”, Balt Leenman explains. “But we both partners work from a joint value proposition that do not want to focus solely on one or two vendors. serves the customer. “We can enhance our success by We want to be an independent system integrator that fully understanding Oracle‟s solution and its roadmap. 74
  • 77. In most cases we cannot build a system from scratch bonus system for the sales organisation in such a waybut need to take into account the technologies that a referral has a negative effect.already in place, and those need not necessarily beOracles.” What would stimulate Capgemini to sell more Oracle solutions? Changing the reward system wouldThe ideal structure is such that Oracle sells its licenses certainly not work with our biggest customers, thinksdirectly to the client and Capgemini separately bills Balt Leenman. “This would only work in the marketits implementation effort. Oracle has a system with a for small and medium enterprises, where we havereferral fee for the first system integrator that more of a reseller role. It is better to invest more inregisters a sales opportunity in its system, but training and certification and in making joint accountCapgemini is reluctant to use that to protect its own plans and discussing opportunities. IBM for exampleindependence. In the public sector such a reward „sponsors‟ an alliance manager within Capgemini, andsystem is prohibited, and Capgemini has shaped its that works as a catalyst. So communication and joint effort is key, not the reward system.”Co-branding sales volume, which is accurately reflected in a certain compensation per sold item. ThisCo-branding is an effective method of using two compensation will then be part of the expected pricedifferent brands to sell a product or service. This will premium.often concern one main brand, which is mostassociated with the product, and a second brand that Possible variations are:adds a certain quality or emphasis to a particular  If there is any doubt about the combination, theaspect of the product or service. compensation may only become effective once a certain volume is reached, in other wordsArranging a satisfactory financial settlement here after the introduction proves successful; thisrequires determining the value of the added brand. reduces the risk of the product launch for theDoes the added brand justify a higher sales price, or producing brand.does it mainly promote the distribution of the  The compensation may gradually decrease orproduct, yielding benefits on the production side? end once a certain volume is reached, on theBenefits can also be obtained by jointly conducting assumption that if the product proves a hit, themarketing campaigns. These considerations create value of the added brand becomes unnecessary.the following settlement mechanism options: Second, the parties can arrange a fixed sum asFirst, the parties can arrange compensation per sold compensation. This is more appropriate if the aim isitem. This seems particularly appropriate if the added to strengthen the producing brand, rather than tobrand is stronger than the product brand, thus acting boost sales figures. The collaboration between Philipsas an endorser. The brand value of the stronger and Swarovski to produce ornament-like memorybrand translates into a higher sales price or greater sticks is a case in point: the goal for Philips was not to sell large numbers, but to add some glamour to its 75
  • 78. brand reputation. The collaboration may also be The modularity of the product also affects therestricted to a small number of highly exclusive coordination costs and the risks of research andproducts, for instance a Ferrari car with Louis Vutton development. This applies particularly during theupholstery. exploratory phase, during which the product concept is selected based on a large number of ideas andThird, parties can arrange a settlement for their options.marketing efforts. If the producing brand advertisesthe product, the added brand enjoys the benefit of a In the commercialisation phase, the product is moregreater name recognition. In that case the costs of or less determined, but then its a matter of choosingthe campaign can be shared. marketing approaches. Here parties often rely on a Stage-Gate model, as described by Cooper. ThisA combination of arrangements may mean that the means that parties must decide in each stage whichadded brand ends up making a net contribution. This concepts to pursue, and whether they wish tocould be justified if its brand value is inferior to that continue investing. New insights derived from theof the producing brand, in combination with the right innovation process can result in changing attitudesto supply its own product as an ingredient at a towards the alliance, however. This may prompt newfavourable price. This may well have been the case in arrangements about the income and cost distribution,the collaboration between Dr. Pepper cola with or even to a different alliance structure32.NutraSweet sweetener. The possible variations in contract design pertain both to cost distribution and revenue distribution, as wellJoint R&D as the period for which the parties accept obligations.In making arrangements for joint research and As regards cost distribution, in many developmentdevelopment, an important consideration is the collaborations the parties will arrange to each bearextent to which the parties aim to generate shared their own development costs; certainly if both partiesrevenue. It could be that the parties work to produce largely have their own income. Where the partiesa single new product and arrange a particular work to develop a single product, it will generally bedistribution of the revenue, as General Motors and more obvious to define a development budget andMercedes Benz have done in the development of a arrange cost sharing accordingly. This cost distributionhybrid automobile. will often be coupled to the revenue distribution.A second scenario is that the parties work to produce The period may encompass the entire developmentcomplementary products, as did Heineken and Krupps process, or it may involve just one or twowith the Beertender, for which Heineken sells the development stages. In the latter case, the contractbeer kegs and Krupps sells the home tap. Finally, the may contain a provision that if one of the partiesparties may engage in joint research but then decides to pull out, that party will be liable to pay adevelop and market their own product, perhaps even penalty as compensation for the possibly wastedin competition with each other. efforts of the other partner.76
  • 79. In the event of a successful development, the will need to monetise the value of a service contractrevenue aspect becomes relevant. This revenue can across its duration, in order to arrive at a suitablebe shared at two levels. First, intellectual property settlement.rights can be awarded to both partners. They are thenfree to commercialise these rights in whatever way For a highly intensive collaboration, a suitable modelthey wish. This may involve arranging a sharing of may be to arrange a partial share swap. Toyota andthe rights, or that each of the partners is fully entitled Subaru are currently collaborating in research andto the rights (see Chapter 5 for a further discussion). development in order to cut costs. Toyota has beenBut in how far can the rights be reused for a similar Subarus largest shareholder since 2005. At that time,kind of collaboration with a different partner? the Japanese giant took over a share package from General Motors, giving Toyota an 8.7% ownership ofA second option is to make arrangements about the Subaru. Toyota now wishes to increase that packagerevenue that ensues from the joint product or service to 17%, but it does not want to hold more than 20%.development. This can take the form of a certain That way, there is no need for Toyota supervisors topercentage, optionally limited by a minimum or sit on the Subaru board, and Subaru retains itsmaximum for the absolute sum. Here, the underlying independence.intellectual property rights are not settled or awardedseparately. Important aspects to consider include: The unpredictability of joint development is a reason to formulate a broad objective in the collaboration  The chance of any modifications to or further agreement. A packaging manufacturer and a printer development of the product, which could mean once concluded an agreement for the joint that precisely the component supplied by one of development of new commercial packaging the partners is no longer distinctive or becomes materials. Both parties felt there was a market and obsolete. each decided to dedicate 200,000 dollars‟ worth of  For compound products: variations in the people and resources to the project. As part of the proportion of product sales; for instance if agreement, the formulated objective was that both Heinekens sale of beer kegs for the Beertender parties should benefit from the collaboration in far exceeds expectations, so that it benefits similar measure. more from the collaboration than Krupps.  Liability for problems affecting the supply or When the development resulted not so much in new quality of the products, attributable to one of packaging materials but in a patentable method to the partners. reconfigure printing presses for a different format (as this was a cost-determinant factor), this gave rise toCustomers are generally more inclined to accept discussion: of what good what this innovation to theservice models, making these more profitable than packaging manufacturer? Given the objective thatsales models in which the customer pays once for a both parties were to benefit in similar measure, itproduct and then uses this for his own gain. Consider, was agreed to license the new reconfigurationfor example, car leasing as opposed to car sales. In method to other printing companies as well, and toarranging their settlement mechanism, the partners share the resulting revenue. 77
  • 80. RaetContact details: With 800 employees and 6000 customers, Raet is the Stepstone had a development roadmap that meshedhttp://nl.linkedin.com/in number one IT services provider in the field of human well with Raet. It served only a limited client base in/johncohrs resources and payroll services in the Netherlands. the Netherlands, where Raet has the majority of its Aside from HR and payroll processing, Raet is active footprint. With the other candidates there werewww.raet.com in HR process outsourcing and HR consultancy doubts about the technical standards and the services. Alliances are used to add extra readiness to invest. Stepstone was selected as functionalities to the portfolio. partner and retained exclusivity for its own customers. John Cöhrs, Alliance manager at Raet, describes the selection criteria for new partners. “First of all the Raet was granted the exclusive distributorship of partner‟s knowledge or product should have added Stepstone‟s solution. Stepstone‟s product was then value for the customer. Our product portfolios should integrated in the Raet system, with similar layout and be complementary, from both parties point of view. navigation. Extensive knowledge transfer was We accept that there might be an overlap, and we needed, as Stepstone had to learn about Raet‟s can make arrangements for that. And we want to product roadmap, and 70 salesmen and 200 Raet focus on a measurable result of the collaboration.” consultants had to be trained in the Stepstone solution. One of the examples of a joint development is the alliance with Stepstone Solutions. One of the most The parties agreed to bear their own development successful companies in e-recruitment. costs. On the revenue side Raet bills the customers based on the number of concurrent users. Raet pays Raet had initiated this alliance in order to support Stepstone a percentage of the fee for the module. customers with their recruitment process. If Raet When a specific market share is reached, the were to create such a solution themselves, the time- percentage for Raet increases. This is an extra to-marketcould be longer. A merger or takeover was incentive for Raet to sell the Stepstone solution, and not feasible at the time, and the procurement of such it is perceived as fair since Stepstone on its own a solution would not provide exclusivity. Therefore an would not have been able to achieve such a market alliance was the best option. share. Three parties were shortlisted and compared in terms For the development of new products, for example of the potential for technical integration and the specific complex reports, there is an extra incentive alignment of their business model with Raet. Raet for Stepstone to go live as quickly as possible. The believes that HR software will evolve completely into revenues for these extra products are split as well. If, a software-as-a-service model. The solution of a for commercial reasons, a discount is offered on the partner should fit into this vision and should support whole package, the discount for Stepstone is the all roles in the recruitment process. same as for similar solutions in Raet‟s offering. 78
  • 81. John Cöhrs explains the success of the alliance: “Both products that compete with Raet, and in some casesparties have been extremely open to each other we have the same customers. Even then we canabout their own interests, and therefore we could agree on the right course of action.”work out the right solutions. Stepstone has otherTechnology licensing technology is granted exclusively to one party only, possibly paired with knowledge transfer and further support, it becomes more like a real form of collaboration. Technology licensing occurs particularly A well readable and extensive in the pharmaceutical industry. publication about technology licensing is made by the World There are basically two settlement methods Intellectual Property available: Organisation. See www.wipo.int/ip-  A one-off or periodical compensation for making development/en/strategies/pdf/ the technology available, enabling unlimited publication_903.pdf use within a specific context, for instance within one company.  A compensation according to usage, for instance a fixed sum for each product that incorporates the technology. This compensation may be tied to an absolute minimum, an absolute maximum, may vary with the volume. If a party provides its own technology exclusively in return for compensation, it will want assurances that the technology will also be marketed. This so-called shelf clause is discussed further in Chapter 5.Licensing in general means to share the right to use abrand, software program, artwork or technology that It is also important to make arrangement for theis protected by intellectual property rights. In most transfer of knowledge and further developmentcases, payment is due according to the extent of use, support. This generally pertains to the deployment ofrather than as a one-off transaction. personnel, which can be settled on the basis of working time.Technology licensing, in its simplest form, is more ofa purchase-sale transaction with a variable paymentmodel (just as you pay for the mileage of your leasecar) than an alliance. However, as soon as the 79
  • 82. Shared investment use. This will often be coupled to the cost structure. A warehouse will generally be calculated on the basis For a shared investment, in most cases the cost of availability, since this involves various fixed costs. estimate should be known in advance with a fair A transportation vehicle, on the other hand, will more degree of accuracy. Parties must in particular agree to often be calculated based on use as being the a cost distribution key, coupled to a user right or a primary source of costs. procedure to share the capacity of an investment, for instance when four road construction companies One option is to lease the shared investment to third jointly operate an asphalt plant. parties, whenever it is not utilised by the partners. This will of course require additional agreements to A distinction can be made here between payment regulate the associated leasing efforts, but it can help according to availability and payment according to reduce the effective costs for both partners. ShellContact details: Shell has worldwide around 1500 joint ventures for Each year the actual capacity demand of each partnerhttp://nl.linkedin.com/in/ various purposes. Luc Meesters is as joint venture is added up, and a price per unit of oil transported islucmeesters manager and board director involved in a number of calculated. This price could be based on the the downstream partnerships. He explains about the operational costs with a mark-up for the investmentswww.shell.com financial arrangements with regard to shared and possibly a profit element. In most cases, if 50 to investments. 100% of the maximum capacity is used, this method will benefit all partners because of the relatively low “An example is the joint development of an oil transportation costs. pipeline from a port city inland. The refineries of various owners can benefit from such a pipeline and If a company is an overshipper (volumes transported it makes sense to combine the demand and to build are higher than interest) than it contributes more one pipeline that serves all involved. Cost of than it proportionally would compared to its transportation are just one part of the total product shareholding. In such a case, if profits would be a cost. result of the companies‟operations, an overshipper would receive only dividends in proportion to its In such cases a mechanism needs to be devised to shareholding. split the investments and the costs associated with the operation of the pipeline. The investment costs On the other hand, if only a small part of the capacity can be divided between the participants according to is used, the price per unit of oil transported can the expected use of the pipeline or interest holdings. increase dramatically. Eventually partners may prefer Each will receive an equivalent share in the joint another mode of transportation, e.g. by barge or by venture that will own and operate the pipeline.” truck, leaving the pipeline unused. In that case operational costs may be cut, but there is no payback from the investment, which are sunk costs. 80
  • 83. Alternatively, depending on the region, type of years, and up to the present the demand for fuel haspipeline and specific requirements, the capacity could only continued to grow. In other industries, however,be offered to others, or not. this may be different. The obligation to purchase a minimum capacity or paying a penalty if not meetingLuc Meesters: “In case of a shared investment in an the nominated volumes, could then be a solution tooil pipeline, the risk of having too little demand is keep the costs for each partner below a specifiedslight. Refineries are built for periods of more than 30 level.”Reciprocal hiring agreement The costs for the coordination of the planning processes is generally borne by the party that incurs the costs. A good example is offered by code sharing in the airline industry. This is an agreement by which two or more airlines include the same flight in their schedule. A seat can be purchased from one airline, though the route is actually operated by a partner airline under a different flight number or code. This offers greater access to cities through a given airlines network without having to operate extra flights, and makes connections simpler by allowing single bookings across multiple airlines. In most cases, the booking systems of the participating airlines are linked to ensure the availability of seats and to provide the right price information from the operating carrier to the marketing or selling carrier. There can be various mechanisms to determine the price for the seat that has to be paid to the operating carrier. At one end this can be part of the price for the total journey,A reciprocal hiring agreement will mainly entail equivalent to the number of miles travelled withagreeing to tariffs for the deployment of personnel. each airline, or it can be a fixed amount. In mostThese tariffs can vary from a cost-plus tariff (specific cases the conditions are reciprocal. IATA, thesalary and equipment costs, plus a bit of overhead) to International Air Transport Association, has a clearingregular market-level tariffs. house to execute the billing and financial settlement of all these inter-airline sales transactions. 81
  • 84. Unusual supplier risk becoming more familiar. In Germany the commissioning party tends to divide the work intoIn most cases, this form of alliance has the features small functional parcels, in order to contract these outof a purchase-sales transaction, but with a greater at the lowest possible cost.emphasis on joint management on account of themutual dependencies. In financial terms this is mainlya matter of framing and pricing the risks, as is Compensation for thecommon in any sales transaction. contractorWhere risks can be affected significantly by the Alliance model compensationcontracting-out party, it is advisable to arrange a Traditional fixed pricebonus/malus construction to ensure the parties profit for the clientinterests remain aligned, and to improve the extra profit forconsultation structure. In turn, the contracting-out the contractorparty will want to incorporate some incentives tomotivate the supplying party, for instance withrespect to the quality of services, which has nowbecome harder for him to control. 0 Costs Actual costs estimate (including compensation for overhead and modest profit)Various models have been constructed for this in the Figure 26. Cost allocation model used in the construction industry,construction industry, such as „Design, Construct, which encourages the contractor to also consider design andBuild, Operate, Finance‟ and more joint venture- environmental factors.oriented approaches. Here, the smartness of thedesign has a significant impact on the productioncosts. That is why a different cost allocation model It is good to consider that there may be more ways tomay be used in certain instances, in which the total structure each of the forms of alliances, described inconstruction costs are estimated in advance, and the this chapter. In principle, the possibilities areclient and contractor jointly strive to limit the costs as countless. However, one might do well to strive for amuch as possible, starting from the design phase simple structure that can be explained easily to all(Figure 26). Cost savings and excesses are shared involved in the alliance. A simple structure will limitwithin certain limits. the effort necessary to draw up a contract as well. The next chapter will cover some aspects of theThe extent to which commissioning companies are formal agreementopen to the tendering of work in the form of alliancesdiffers per country. When we look at the constructionof infrastructure (roads, gas pipes, water purificationfacilities), this appear to be quite common in theUnited Kingdom. In the Netherlands, the Ministry ofFinance has set up a knowledge centre about public-private partnerships, and this approach is gradually82
  • 85. 5. The formal agreement occasions in which the advice of a legal expert or contract specialist is important:  When formulating ones own strengths, competences or resources: in how far have knowledge, brands or documents been established and protected? Has the confidentiality of knowledge that cannot be protected been arranged well?  When entering talks with the other party: will a declaration of confidentiality be signed? What would this declaration reasonably cover, and what not? And in how far are the agreements in such a declaration enforceable?  When fleshing out the collaboration in a contract: which legal form do you choose? What will you formally arrange, and what not? In how far do you take account of new possibilities and patents?In the previous chapters we focused on the creation This chapter focuses on third point in particular.and distribution of value. A collaboration betweentwo or more parties will eventually be laid down in In any collaborative process, it is important to keep Do you have a clear view on thean agreement. The purpose of the collaboration and legal aspects in mind from the outset. However, this contents of all your collaborationthe distribution of revenues and costs are important is not to suggest that you should bring along a lawyer agreements? Alliance experts has ainputs for the contract. This chapter will delve deeper to your first meeting, certainly not in an equivalent legal check that supports in gettinginto some general aspects that can apply to various situation within the same country. If the situation insight, for example for when aforms of alliances. involves a partner abroad, then it does make sense to merger or acquisition becomes formulate a protocol in advance to create relevant. Furthermore we point out equivalence, by agreeing which company staff will what the major risks and uneasy engage in consultation, and by choosing a conditions are. Please visitProcess negotiating language that both parties can use with www.allianceexperts.com/toolkits equal ease. The same applies for the law to whichEven before engaging your partner in dialogue, it is the agreement will be made subject.important to consider the possible legal aspects. Asindicated in Figure 27, there are three important 83
  • 86. agreement to lengthyProcess documents. In most cases these agreements are very Required Objectives general, without any competences Partner Collaboration Implementation sanctions. Drafting an NDA selection agreement of collaboration with a clear sanction, for Own competences example a fine of 10,000 dollars in case of aLegal aspects confidentiality breach, shows distrust at a momentAre all own What agreements Which legal form where parties trust eachresources are needed to do we choose? other just enough to startsufficiently enable frank How do we negotiations. It is importantprotected, by discussion with arrange the to balance an NDA and topatents, copyright the partner? What collaborationand brand right as happens if the contractually? find the right tone of voice,well as proper collaboration is because an aggressively putconfidentiality? called off? agreement can damage the collaboration.Figure 27. Contractual aspects in the process of arriving at apartnership Contract or joint ventureIt makes more sense to first let the discussion be An important choice to make when fleshing out anconducted by those that actually stand to benefit alliance is whether it will take the form of afrom the returns, meaning an executive board contractual agreement, or of a shares transactionmember, the business development manager, or the (which includes a joint venture). Both options comemarketing manager. They can then work toward in several varieties (Figure 28).what is known as a „deal sheet‟, which lays out ineveryday (non-legal) language all the important For a contract between parties, without forming aarrangements such as contribution, authority, new legal entity, we can distinguish between:distribution of costs and revenue, and so on.  a unilateral agreement with a clearly definedAs soon as the deal sheet has been finalised and use of the other partys resources, such as aapproved by both sides, the parties legal staff can licensing agreement, an R&D agreement orconvert it into a contract that also arranges matters distribution agreement; andsuch as liability, dissolution following bankruptcy, and  a bilateral agreement, in which both partnersapplicable law. contribute resources to the collaboration, such as a marketing alliance, production alliance orA remark on the confidentiality agreement or Non- an optimised customer-supplier relationship.Disclosure Agreement (NDA): There are variousmodels available, ranging from a one-page reciprocal84
  • 87. Traditional • Transactional customer losses incurred by the alliance. The structure then contract /supplier relations resembles a contractual arrangement. Contractual Unilateral • Licensing, franchising agreements agreement • Long term outsourcing In all four cases (unilateral and bilateral contract, minority stake and joint venture), the point is for the Bilateral agreement • Joint R&D, marketing, companies to find a way to gain access to the distribution Partnerships partners valuable resources without losing control Minority • One sided over its own. share • Exchange of shares • 50% - 50% The scholars Das and Teng contend that the Share Joint transactions Venture • Other proportions preference for the type of collaboration depends on the type of resources contributed by the two Dissolve a company • Merger • Takeover parties34. Are these:  material resources that cannot be copied, suchFigure 28, Different legal forms of collaboration as money, production means, personnel, distribution channels and patented knowledge;For a shares transaction we can distinguish between: or  knowledge-based resources that can be copied,  a minority stake taken by one the partners in such as work methods, market information and the collaborative partner, or a share swap in databases? which the parties exchange shares;  a separate new legal person in which the The most likely preference depends on the collaborating partners are shareholder, combination of resources contributed by parties A and commonly known as a joint venture. B, as represented in Figure 29.Depicted in this way, an alliance resembles a half-way house between two independent parties Company Bengaged in a traditional contract or a merger or Knowledge based Material resources resourcestakeover, but research has shows that alliancesbetween companies rarely result in such a merger or Preference by A and B for Material Preference by A for a jointtakeover33. unilateral agreement, in venture: here knowledge resources which use of resources is is shared most quickly compensated Compnay AThe term Joint Venture is frequently used to describea collaborative business. However, the term does not Preference by A and B for Preference by A for ahave a legal status in all countries. It can be a regular Knowledge minority share in B to bilateral agreement: based detailed arrangementscompany with shareholders and limited liability, resources retain control over own can be made about knowledgewhere the shares are distributed among the partners. knowledge sharingThis is the way it is used in this book. In othercountries it can be an entity without the possibility to Figure 29, Most likely preferences regarding type of alliance, from company As point of viewhold assets, where the partners are both liable for 85
  • 88. If both parties contribute their resources to a joint the technology of General Electric was important,venture, then thats where knowledge exchange which is less easy to protect in a collaboration.occurs immediately. After all, the parties involved Through its minority share General Electric receives atshare one primary goal: to make sure the joint least part of the extra value that the collaborationventure is successful. This is to the advantage of the generates.partner that contributes the least amount ofknowledge-based resources, in this case company A. If both parties contribute mainly knowledge-based resources, then the effect of the alliance willSince 2008, the British beverage company Diageo is decrease following a first learning period. Boththe exclusive market supplier of the vodka brand parties will want to arrange the best possibleKetel One, especially in the United States. For this it protection for their own knowledge, and that theypaid 900 million dollars to the Nolet family, who can use newly developed knowledge. A bilateralremain owner of the brand name Ketel One. Diageo agreement is the most obvious option here.and the Nolet family transfer the sales rights into ajoint venture in which both parties hold a 50% stake. CMS law firm has concluded an agreement with The Levant Lawyers, the largest lawyers office inThe agreement is set up based on the interest of Lebanon. "There are important opportunities for theKetel One: this company owns most material further development of our activities in the Middleresources, namely the sales rights, which give East", says CMSs Bob Palmer, partner for Energy andexclusive access to the underlying production projects. Emile Kanaan, chairman of The Levantcompany. Diageo owns most knowledge-based Lawyers, comments on the initiative: "We are veryresources: namely, relevant market knowledge. The pleased with the collaboration with CMS. Thanks tosum paid by Diageo should mainly be seen as this, we can offer our clients access to some 2500compensation for 50% of the sales rights, meaning lawyers and the most extensive network of law firms50% of the profit. in Europe".If, on the other hand, company A contributes the CMS and The Levant Lawyers each offer the othermost amount of knowledge-based resources and access to clients in their own region. The parties canpartner B more material resources, then A will have a also acquire knowledge about doing businesspreference for a minority share in the collaboration between the regions. All relevant aspects can bepartner. This is the best assurance that the partner arranged in a bilateral agreement, in which the twowill not misuse the knowledge acquired in the course parties have an equal position.of the collaboration. Should this nevertheless occur toany substantial degree, then the share will anyway If both parties mainly contribute material resources,be worth more. then unilateral agreements seem most appropriate. Such agreements will arrange, for example, the useIn 2010, General Electric Oil & Gas obtained a minority of distribution channels, patents or other scarceshare in Shenyang, China‟s leading compressor resources in return for money or services.manufacturer. For General Electric this gave furtheraccess to the Chinese market, a hard-toobtain At the end of 2010, 3M Drug Delivery Systems signedresource that Shenyang could provide. For Shenyang an exclusive licensing agreement with Spirig Pharma86
  • 89. AG, a Swiss manufacturer of dermatological and The choice of organisation form has a direct influencedermocosmetic products. Spirig Pharma AG will utilise on the behaviour of both parties. If it is both partiesone of 3M‟s immune response modifier (IRM) objective to develop a large amount of new sharedmolecules to further its development of treatment for knowledge, for example, then a joint venture wouldsun damaged skin. In this case just a unilateral be the obvious choice, despite the fact that a jointlicensing agreement is sufficient. venture implies greater overhead costs (notary, accountant, and so on) and will demand more time in terms of reporting and governance.KLM-Northwest Contact details:The KLM-Northwest alliance dates back to 1989 and involving more than one leg, the revenue will be splitwas one of the first alliances in the airline industry. according to the miles per leg, with a certain http://nl.linkedin.com/pub/Although KLM has since merged with Air France and minimum price per mile for the partner that is henk-de-graauw/0/761/859Northwest with Delta Airlines, the alliance still exists delivering the half-product.and remains successful. Henk de Graauw, until 2010 www.klm.comDirector Alliances for KLM, clarifies the different types The collaboration is extended to other aspects in theof alliances and their benefits. case of the three large airline alliances: Skyteam, OneWorld and Star Alliance. Within these alliances“KLM actually has four types of alliances. With there are special inter-airline billing agreementssuppliers such as General Electric, for the which have a larger extent of revenue sharing. Inmaintenance of aircraft engines, even to serve other addition, airlines jointly invest in lounges, alignairlines; with retail partners such as American frequent flyer programmes, and collaborate inExpress, for the combined credit and frequent flyer marketing and sales.card; with providers of other modes of transportation,such as our 10% stake in the high speed train to The three alliances differ with respect to theirBrussels, which we incorporate into our product as an exclusivity policy. Members of the Star alliance arealternative to a flight; and most important of all, prohibited from code sharing with airlines fromhorizontal alliances with our competitors.” outside the alliance. The Skyteam members are relatively free to do so, as long as it does not harmThe horizontal alliances vary in intensity. First there is the interests of other Skyteam members. OneWorld isthe more tactical collaboration on a route between a very open alliance and has the most code sharingtwo airlines that need not even be in the same with airlines outside the alliance.alliance. The main objective is code sharing: oneairline sells a flight and buys the transport capacity As collaboration with a partner on a certain routefrom the other airline. intensifies, new problems tend to arise; for example the question of who should invest in extra capacity?The international association of airlines, IATA, has Or in adverse times, who should be the one to keeprules for this inter-airline billing and provides clearing its airplanes grounded?services. In general, if a ticket is sold for a flight 87
  • 90. One solution is to create a virtual joint venture. This De Graauw does not believe the new airlines in themeans that both parties bring in the costs of their Middle East will join one of the three alliances soon.aircraft, personnel and support operations, which are “First of all their benefit is not that clear: they hardlysplit along with the revenues. The assets themselves have a home market, in contrast to the airlines thatremain with the partner companies. founded the three big alliances. Their set of destinations is more competitive thanKLM – Northwest was the first transatlantic alliance, complementary with those of the three big alliances.followed by Lufthansa partnering with United and And second, these state-owned airlines have athen British Airways with American Airlines. These different business model and investment pace.”kinds of alliances are closely monitored by thecompetition authorities. It is not permitted to have In 2009 Skyteam changed its organisational structure,more than 80 to 90% of the business between two making the decision-making process morecities; there should always be reasonable centralised. Up until then there were a lot of workingalternatives. Most alliances are therefore created for committees with rotating chairmen. When Leo vanlong-haul routes. It helps if it is clear that the Wijk left KLM he was asked to remain chairman ofcustomer benefits as well, for example from a better Skyteam, and an office near Amsterdam Schipholchoice of flights spread throughout the day. Airport was created with a managing director and four vice-presidents, to safeguard the continuity ofThese joint ventures may incorporate incentives to the working committees. The managing directorsell connecting flights for the partner. These are reports to the Skyteam Supervisory Board, with allalways combined with the revenue management the vice-presidents for alliances of the airlines.systems of both airlines to ensure a suitable mixbetween early bookings against a lower price and Star Alliance has had such a centralised structure for ahigh-priced last-minute bookings. longer time. There is an office in Frankfurt with more than 120 staff members and an ex-SAS CEO asIn the case of the KLM – Northwest alliance, both chairman. OneWorld recently established a supportpartners have closed down their own sales offices in office in Vancouver.the other partys home market. The joint venture hasits own revenue management system. What does Henk de Graauw anticipate for the future? “The structure with the three large alliances willHenk de Graauw: “It is important to have a 50%-50% remain. There might be potential for a fourth alliancejoint venture. This makes it easier to settle costs and in Asia, but I think the changes in membership will berevenues, and it is more motivating for the driven by mergers and bankruptcies. I predict thosepersonnel. Such alliances are generally for the long mergers to first take place on a national scale, andterm, and a great deal of investment goes into then within an alliance. Airlines within an alliance aremaking processes work. The structure should be already better aligned at an operational level.”reflected in the governance of the partnership: itsnot a good situation if one party has more influencethan the other.”88
  • 91. Intellectual property publication). Regarding a discovery or invention made in employment, the ownership depends on the employment conditions and whether the making of the discovery or invention is part of the employers tasks. Thus, the inventor does not necessarily become the owner of the patent. If the collaboration between two parties results in the development of new knowledge (for instance in an R&D alliance) for which a patent application is filed, then it is important to have determined beforehand how to go about it. If the patent is filed under both companies names, they will jointly have to decide about its use or licensing. It is wise, in this respect, to distinguish between the ownership of the patent and the right of use. It can be arranged contractually that the ownership remains with one of the partners or with the joint venture, and that both partners (and possible merger partners and group companies) have the right to use the invention, but that it requires the consent of the other party to resell the invention or to license it to aPatents that can be filed as a result of collaborative third party.knowledge development form a special category ofreturns. A patent is a set of exclusive ownership Moreover, some patents build on earlier patents; forrights that a public authority awards to an individual example a medicine that is dependent on a patentedor company in exchange for the publication of the production method. This is also known as backgrounddetails of the discovery or invention. This publication knowledge. If this is relevant to the collaboration,is mandatory with a view to advancing the state of then it has to be arranged how to deal with suchtechnology. A patent gives the right to prevent others background knowledge, if this knowledge wasfrom making, using, selling, offering to sell or developed previous to or outside the partnership. Itimporting the discovery, in the country where the could be that this knowledge derives from a thirdpatent applies. Most patents are effective from the party, which means that its use needs to be arrangedmoment of publication and for a maximum duration carefully to avoid being held liable for breachingof 20 years after the patent application. patent rights.In most countries, patent rights are awarded to the Finally, one should consider how to deal with patentsparty that first files the patent application, provided that have been developed as part of thethe discovery or invention has not already become collaboration, but that do not support the goal of thepublic knowledge (through use, sale, or any form of 89
  • 92. collaboration, and for patents that are filed after the Four complicating factorscollaboration has been terminated. A number of complicating factors may crop up whileMost parties that regularly file patent applications will forming an alliance. Four such factors, which arehave their trusted specialists to conduct the irrespective of the type of alliance or its legal form,negotiations. For collaborations in which patent are discussed below.applications are less a matter of course, the„Intellectual property needs matrix‟ by Slowinski andSagal can offer some basic guidance35. This matrix is Difference in sizeelaborated for a joint venture in Figure 30. Patents developed previous to Patents developed during partnership (background partnership (foreground knowledge) knowledge) Within the Patents remain with A and B, Patent becomes property of context of free use within the joint joint venture, free use for A collaboration venture and B for the designated goal Outside the Use right for the partner if the Patent becomes property of context of developed patent builds on joint venture or of the partner collaboration former patent to whose business the patent applies, but free use for the other After termination Previously awarded use rights New patents owned by A or B, of collaboration remain in place free use of patents developed in the joint ventureFigure 30, Possible arrangements for patent rights in a jointventureFigure 31 outlines the arrangements for acontractually arranged collaboration. The maindifference is that, in this case, there is no sharedcompany to which the patent rights can be allocated. Patents developed previous to Patents developed during partnership (background partnership (foreground knowledge) knowledge) Within the Patents remain with A and B, The patent ownership remains Whenever a smaller company collaborates with a context of free use for the partner if a with the one that actually collaboration patent developed in discovered it, but free use larger company, chances are that the collaboration collaboration builds on a right for the partner previous patent carries much more significance for the smaller one. Outside the context of In principle no use right, but paid licence is possible Ownership with A or B, no use right for the partner This places it at risk of being neglected or collaboration overshadowed by the larger company. A change of After termination Previously awarded use rights Previously awarded use rights of collaboration remain in place remain in place management in the larger company can even mean a loss of all interest in the collaboration.Figure 31, Possible arrangements for patent rights in acontractually arranged collaboration The larger company, meanwhile, faces a different risk: it is likely that the knowledge and commitment of the smaller company strongly depends on just a90
  • 93. handful of people. If any of these should leave the interim payments and the use of the providedcompany or lose interest, this may jeopardise the expertise. Every bit of knowledge transfer should be Frequent evaluation of thecollaboration. The smaller company may also lack the met with immediate reward, at least partly. This collaboration helps to avoidstrength or scope to go along with new reward can be payment for a patent or an hourly unpleasant surprises anddevelopments or market changes, which can also tariff for the deployment of experts. In addition, a deteriorating results. Alliancedevalue the collaboration. success fee may be arranged for every successful experts has a toolkit for this market introduction. purpose. Periodically we ask for theThese issues generally play a role if the difference opinion of the key players frombetween the companies, in terms of turnover, The smaller company cannot force its partner to both sides and report the sentimentstaffing and size, exceeds a factor of 10. This is not an market a product containing its expertise. For that within the collaboration. Seeabsolute figure. Doing business with an autonomous reason it makes sense to couple any exclusive www.allianceexperts.com/toolkitsbusiness unit of a large multinational can be very like agreement to a shelf clause. This means that, if thedoing business with a small company. And a high- product development does not result in a markettech company with 20 people on the payroll will introduction within a predetermined period (that is, isoften be a much stronger partner than a production shelved) or does not achieve a certain sales volume,company with 20 employees. then the smaller party is free to offer its patents and experience to another party.As a „standard‟ example, consider smaller technologyfirms that may have just one or a few products, but That this is something to take seriously was a lessonwith which they truly contribute something new to learnt by the British smartphone company Sendo,the market. Such companies often consist of the that entered into an alliance with Microsoft in 2000.founders plus a few others, and they lack the size and Sendo had advanced quite a way in developing askills to commercially exploit their product. Here, telephone suitable for Internet applications, the Z100,collaborating with a multinational is an obvious and Microsoft was developing software for it. Theoption: it gives the larger company access to agreement stated that the Z100 would be developedtechnology, and gives the smaller company access to further jointly, and that Microsoft would receive partthe market. of the profit.However, the companies interests may differ. For the In 2001 Microsoft invested 12 million dollars intechnology firm, the product for which the alliance is development, and was entitled to appoint aset up may yield the lions share of their turnover. For supervisor to the Sendo board. From that moment on,the multinational, the added revenue may basically the development of the Z100 started to lag behind.be negligible. Certainly if the manager (at the Sendo claimed that Microsoft was secretly schemingmultinational) who made the deal leaves or makes to rob the company of its technology, marketan internal career move, the technology company knowledge and customers. In 2002 Microsoft enteredmay wind up in an impasse: the exploitation rights into an alliance with another company to develop ahave been sold but are not generating any income, product comparable to the Z100. Sendo and Microsoftdue to the larger companys lack of interest. wound up in a drawn-out court case, and the Z100 disappeared from the market.From the smaller companys perspective, the best For the larger company, it is important to havesolution would be to make clear arrangements about assurances with regard to the efforts and availability 91
  • 94. of the smaller companys key staff. This can be Small companiesarranged, for instance by coupling this to a bonus orby making the payment of compensation conditional Increasing numbers of knowledge workers areon their contribution. offering their services as an independent one-person company, or with just one or two co-workers. It is particularly attractive for this category of companiesMore than two parties to collaborate as it will enhance their profile on the market and enable them to bid on large assignments.Working with three or more parties introduces a newsort of dynamic in an alliance, certainly if these However, the downside is that formalising aparties decide to collaborate in a new legal entity. In partnership is a comparatively larger burden for athe latter case, it may happen that the majority small company than a large one. They will often lackmakes a decision that is unfavourable for the experience with such contracts, let alone have aminority. This is comparable to an association that lawyer in employment. Fiscal aspects will need to bedecides to raise the contribution fee to finance new examined, regardless of how big the deals are.investments. Members not interested in those new Furthermore, in smaller companies this kind ofinvestments will have to contribute regardless, or investigative work is prone to getting snowed underelse must relinquish their membership. by the day-to-day operational activities.There are two mechanisms that can reduce the It is therefore important for small companies to use achance of such decisions being made: standard organisation form to arrange governance, finances and liability. Practical aspects of the  First, the statutes of the new legal entity or a collaboration such as consultancy structures, separate agreement can stipulate that certain marketing, household regulations and administration decisions require a larger majority or unanimous will often be taken care of as part of the group consent; for instance, decisions that will change dynamics. the scope of the collaboration.  Second, there will always have to be some sort In the Netherlands, Alliance experts has set up a of equilibrium between the partners. If a collaborative structure for solo entrepreneurs in the decision clearly disadvantages one of the form of a cooperative. This legal form is used participants, he may decide to quit the infrequently, but it does offer a means of letting collaboration or may start exhibiting members enter and exit the collaboration without opportunistic behaviour. requiring a notary. Every member has an equal say in governance and receives a share of the profitWorking with three or more partners often bears proportionate to the amount of work that he or shefeatures similar to working in a network (see Chapter performed through the cooperative. The cooperative3). A collaboration between competitors will concludes the contract with the client and arrangesgenerally have a very formal and transparent the execution of the assignment with one or morestructure. If it concerns complementary parties, it is members. More than 25 cooperatives have been setcustomary for one of the parties to shoulder the up in this way within the span of one year.coordination.92
  • 95. Public-private partnerships A great deal of knowledge, influence and customer contact is contained within public organisations. A window cleaning firm with a recommendation letter from the municipal authority will more easily find customers within that municipality. Furthermore, public organisations also have their markets and objectives, except that their primary objectives are often of a non-financial nature. Citizens satisfaction, safety, quality of life and ensuring an attractive neighbourhood are typical examples. Finances form a necessary condition here, and this is where opportunities for collaboration may be found. Whoever is able to arrange a collaboration in such a way that it helps the public organisation fulfil its goals more successfully, or can ensure that extra funds remain to devote to quality improvement, has a good chance of engaging a public entity in such collaboration. The point is thus to pursue parallel objectives. The organisation form for a public-private partnership can be a new legal entity, but in many cases theSo far we have examined collaborations between two public organisation assumes a facilitating role whileor more private organisations. But what if the the business performs the activities. A publicopposite partner is a government agency or public authority may, for example, sell land to a projectinstitution, a school or a hospital, or a research developer and set certain parameters for theinstitute? It may well be that businesses view such development of a new housing estate. Or, a group oforganisations as inward-looking, bureaucratic and primary schools may refer parents seeking after-difficult to work with. Conversely, the public sector school care to a specific commercial child care centre.may see collaborating with the business sector as In such instances, an arrangement concerningsomething akin to selling your soul to the devil. financial settlement may suffice. 93
  • 96. HagoContact details: Hago is a contract cleaner with approximately 9000 The joint venture, as well as her job, started in Junehttp://nl.linkedin.com/pub/carola- employees. It is part of the Vebego concern, active in 2010.put-de-vreugd-mfm/5/a20/451 facility services and cleaning, and employing some 35,000 people worldwide. As contract cleaning is a The alliance is structured as a Limited Liabilitywww.hago.nl competitive industry, most of the Hago business units Company where Hago holds 49% and St. Jacob 51% have an operational excellence strategy. Everything is of the shares. Employees from both Hago and St. focussed on reducing the time required to clean an Jacob are seconded to the new company but remain office, classroom or shopping mall. on the payroll of the respective organisations. The necessary assets, such as cleaning machines, are There are exceptions: Hago Healthcare, with around transferred to JacobSchoon 1000 employees in the Netherlands, strives for customer intimacy. Carola Put – de Vreugd, manager One of the reasons for the alliance was that a tax of the Vebego/Hago-St. Jacob joint venture advantage could be obtained. As a public institution, JacobSchoon, explains why: “In healthcare the cleaner St. Jacob could not reclaim the Value Added Tax that does more than just clean the room of a patient or it paid, but the JacobSchoon could. However, while elderly person. Making beds, supporting the care the negotiations were ongoing, the government process, flexibility in planning and interacting with lowered the VAT percentage on cleaning services the people is part of the job as well. The difference from 19% to 6%, which somewhat undermined the between cleaners and nurses is limited from the original purpose and hampered the decision process. point of view of the clients. The only challenge with this strategy is to recruit and train the right people for The other reason was to professionalise the cleaning these low-paid jobs.” activities with the techniques that Hago brought in, such as cleaning with a microfiber cloth instead of Carola used to be facility manager at St. Jacob, a with water and soap. Hago personnel were better nursing organisation with 1500 clients and 1500 trained in terms of speed than the St. Jacob cleaners, employees across 8 locations. St. Jacob aims to but would still have time to spend a few minutes on provide experience-oriented and demand-driven social interaction. care, under the motto „remarkably close‟. The strategy is to focus on the core business, which is the The target setting for a more efficient work method care, and to arrange all other aspects in partnerships. was to achieve a 2.2 million euro savings. This was The joint venture with Vebego/Hago is the first result one of the major items during the negotiation of this strategy. process, along with the tariffs for extra work. Hago and St. Jacob arranged to both invoice the activities of As facility manager, Carola Put – de Vreugd was one their workers to JacobSchoon, the only difference of the members of the outsourcing team, and she being that St. Jacob invoices the actual hours worked became enthusiastic about Hago. When the and Hago the scheduled hours. This allows Hago to agreement with Hago was finalised, she applied for make a better profit by working more efficiently. the job of joint venture manager, which was to be The parties also considered transferring the St. Jacob fulfilled by Hago in close consultation with St. Jacob. employees to the payroll of the joint venture. 94
  • 97. However, this turned out to be a complex operation and now St. Jacob is getting used to this process aswith relatively large salary increases. It was agreed well. At some locations the cleaners help with thethat over time the percentage of St. Jacob workers care process while the nurses share in some cleaningwill decrease. The division of shares in JacobSchoon activities. This needs to be worked out better.will remain unchanged, on account of the fact that St. Activities that were not considered during theJacob wants to retain control. negotiations, such as floor maintenance, are opportunities for extra work.So far, the results of the alliance are good. There ishardly any issue between the employees about the Carola explains: “There was already a strong measuredifference in salary between Hago and St. Jacob of trust between St. Jacob and Hago. That made itcleaners, the sickness absenteeism rate is falling, and possible to forge the alliance in a short time. Noeveryone concerned is satisfied. other parties were considered, except for another division of Vebego that could perform some extraThe challenge for Carola Put – de Vreugd is to care tasks, but this did not suit the philosophy of St.optimise the financial results of the alliance: Hago Jacob. The mutual trust provided a perfect start forwas already used to charging all the costs it incurs, the joint venture JacobSchoon.”Termination of the alliance In some cases a collaboration will end upon the completion of a project. Apart from possible shared guarantee obligations, the bond between the partners is dissolved. In most cases, however, it cannot be envisioned clearly beforehand when a collaboration will cease to exist. This means that two matters have to be arranged:  It needs to be clear who can end the partnership: each partner individually, or only by all partners jointly? If no arrangements have been made, then generally the latter case applies.  If the alliance is terminated, it needs to be clear what happens with the possible reserves, debts, patents, rights and obligations. It could be that one of the partners wishes to continue the activities and wants to buy out the other. Various regulations exist to facilitate this process. 95
  • 98. The collaboration is not proceeding While a partnership involving natural persons runs The competences of the contractual board should be the risk of one the partners passing away, in a laid down in the collaboration agreement, and mayas it should, and youre starting to partnership between businesses there is the risk of range from defining the research or marketingworry. Where do things go wrong? one the partners going bankrupt. Also for that budgets to appointing the daily operationalAlliance experts can analyse the situation, the continuation of activities needs to be management of the partnership. The board memberssituation and bring forward the right arranged properly, for instance by arranging to can also address opportunistic behaviour exhibited byspecialist to support you with the transfer the patents to the surviving company. one of the partners. If the contractual board fails tomarket approach, or the work reach agreement, the next step would be to call onprocesses, the working relationship, One of the most important aspects to consider is mediation by a neutral third party, or to dissolve theor the legal agreements. See what risks you run that could lead to a termination of alliance in accordance with the provisions of thewww.allianceexperts.com/toolkits the collaboration, and what you can do to guard collaboration agreement. The simple fact that this against that. The product or service that you have possibility exists without it being necessary for one of developed may fail to generate interest. If you are the partners to have committed a real breach of the one contributing the concept (preferably contract, with all the ensuing damage to reputation protected by a patent or copyright), are you in a and lost opportunities, is often enough to desist a position to switch to a partner with more marketing partner from engaging in opportunistic behaviour 36. power without incurring excessive costs? Or if youre the bigger company considering collaborating with a Precisely which rights you can negotiate depends small inventor, what will happen if you run into a primarily on your dependency on the alliance, and dispute, or if his venture collapses? Does it mean you the value attached to it by your partner. Many lose your entire investment, or can you acquire the biotechnology firms develop components for patent for a small fee? Since there is no legislation on medicines and enter alliances with pharmaceutical this point in many countries, you are free to make companies that will market these products. An your own arrangements in a contract. analysis of a large number of alliances indicates that the distribution of revenue is more favourable for the An important tool to help settle disputes and prevent biotech firms to the extent that their products are a premature exit is to appoint what is called a more successful, and the medicines have been „contractual board‟. This board is composed of developed further. Pharmaceutical companies receive representatives of both parties, that all have equal a larger share to the extent that their product voting power. All parties thus need to come to an portfolio is healthier, meaning that they actually have agreement in this board in order to take a valid less need for a new medicine. decision. In a joint venture this board may coincide with the shareholders meeting. For two small companies it may simply consist of both owners. 96
  • 99. Conclusions In each case, the principal concern is value creation The Association of Strategic Alliance and the distribution of the added value of Professionals encourages knowledge collaboration among the participating partners. sharing and supports the Alliances that seek to enhance the relevance of a development of standards. See business for its customers often apply a profit-sharing www.strategicalliances.org mechanism based on the additional sales or extra margin. For alliances devoted to developing unique products, the cost distribution is generally quite clear, the principal issue being the ownership of intellectual property rights. For alliances geared to achieving cost advantages, splitting those advantages is often a simple matter. Another initiative is the The various cases demonstrate that an alliance often development of a British Standard comprises several areas in which the partners BS 11000 for Collaborative business collaborate. By analysing collaborative ventures in relationships. This framework helps terms of several basic types, it becomes easier to organisations to establish, manage establish cost and profit allocation mechanisms. This and improve strategic partnering helps standardise the process of forging an alliance, both within and across the public which contributes to the main aim of this book: to and private sectors. SeeAlliances can play a significant role in the pursuit of facilitate companies wishing to enter into alliances. www.bsigroup.com.company strategy. The type of strategy throughwhich a company seeks to stand out in the market Clarifying the goal of an alliance and elaborating awill generally determine the most suitable form of mechanism for the distribution of costs and revenuealliance. is the first step in drawing up a contract. Chapter 5 explores a number of other important aspects.This book took three generic strategies as point of Though each alliance is unique, the underlyingdeparture. These types are based on work by Porter contractual provisions are often much less so. Hereand Treacy & Wiersema, but have been elaborated lies a subsequent challenge towards thefurther with a view to the changing circumstances standardisation of processes, which would make theover the past decade; primarily the immense increase use of alliances as a competitive instrument evenin the accessibility of information and availability of more accessible.capital. 97
  • 100. AcknowledgementsI would like to thank all the people mentioned in thecases. They took the time to answer my questions, toreview the texts and they used their credits forgetting internal approval for publication of the case.Other managers could only speak off-the-record, andI would also like to thank them for their input.Eight people spent some evenings on reading themanuscript and provided me with valuable feedback.I would like to thank Willem Kuijpers, Dirkjan Stevens,Arnoud Vernimmen, Bert Cesar, Jac Sandberg, RickHaas, Peter Simoons and Rolf Braun for their usefulcomments.The illustrations are made by Miroslaw Piepzyk.98
  • 101. Literature 20 Sam I. Hill, Jack McGrath, and Sandeep Dayal, How to brand1 Henri Chesbrough, Open business models, Harvard Business Sand, Strategy+Business, 1 April 1998 21School press, Boston, 2006 Christopher Lovelock, Services Marketing, Prentice Hall, 7th2 edition, 2010 Yiannis E. Spanos, Spyros Lioukas, An examination into the causal 22logic of rent generation: Contrasting Porter‟s competitive strategy Lisanne Bouten, Co-branding, A brand partnership and a newframework and the recource-based perspective, 2000 product, Universiteit Delft, 2010 233 W. Chan Kim, Renée Mauborgne, Blue Ocean Strategy, How to Uit irritatie geboren kassasysteem grote hit bij Amerikaansecreate uncontested market space and make competition irrelevant, retailers, Financieele Dagblad, 6 april 2009 242005 Hakan Linnarson, Paterns of alignment in alliance structure and4 Verna Allee, Reconfiguring the value network, Journal of Business innovation, 2005 25Strategy Vol. 21, 2000 Timbert Haaker e.a., Freeband Business Blauwdruk Methode,5 Michael E. Porter, Competitive Strategy, 1980 2004 266 Michael Treacy, Fred Wiersema, Discipline of market leaders, Henri Chesbrough, Open innovation, the new imperative for1995 creating and profiting from technology, Harvard Business School7 Press, Boston, 2003 Art Weinstein e.a., How Marketing Strategy impacts corporate 27performance: an expoloratory analysis of USA Today‟s e-consumer Adrian Slywotzky and David Morrison, The profit zone, 2002 2825 internet index, proceedings of ASBBS, february 2008 Robert Metcalfe, Wet van Metcalfe 298 Andrea Ordaninni, Stefano Micelli, Eleonora di Maria, Failure and Benjamin Gomes-Casseres, Alliance Strategies of Small firms,success of B-to-B exchange business models: a contingent analysis 1997 30of their performance, 2004 Annelies de Ridder, The dynamics of alliances, A game9 Bob Hoekstra, Innovation@Philips, Innovative environments, theoretical approach, 2007 31 lezing IMR Conference, 2004 Scott Shane, Venkatesh Shankar, Ashwin Aravindakshan, The10 Colin Campbell-Hunt, What have we learned about generic effects of new franchisor partnering strategies on franchise systemcompetitive strategy – A meta analysis, 2001 size, 2006 3211 Jay Barney, Firm resources and sustained competitive advantage, Hakan Linnarson, Patterns of alignment in alliance structure and1991 innovation, 2005 3312 Laurence D. Miles, Technique in value analysis and engineering, John Hagendoorn, Bert Sadowski, The transition from strategic1972 technology alliances to mergers and acquisitions: an exploratory13 Carolin Häussler, When does partnering create market value?, study, 1999 342006 T.K. Das, Bing-Sheng Teng, A resource based theory of Strategic14 Zeynep Emden, Roger J. Calantone, Cornelia Droge, Collaborating Alliances, 2000 35for new product development: Selecting the partner with Gene Slowinski, Matthew W. Sagal, Allocating patent rights inmaximum potential to create value collaborative research agreements, 2006 3615 Robert L. Wallace, Strategic Partnerships, Dearborn Trade D. Gordon Smith, The exit structure of alliances, 2005Publishing, Chigaco, 200416 Benjamin Gomes-Casseres, The Alliance Revolution: The NewShape of Business Rivalry, 199617 Michael Y. Yoshino, U. Srinivasa Rangan, Strategic Alliances: Anentrepreneurial approach to globalization, Harvard Business SchoolPress, Boston, 1995.18 Young & Rubicam Group, Brand Asset Valuator, 200319 Frank H.M. Verbeeten, Pieter Vijn, Do strong brands pay off?,Nijenrode Research Group working paper, 2006 99
  • 102. Alfred Griffioen first acquired experience inhelping companies collaborate in his role assales manager and marketing manager withtelecom company KPN, and later as businessdevelopment manager with an internationalcontracting and installation company. He hasbeen advising companies since 2006, first asmanager at a strategy consultancy and now aspartner of Alliance experts, which is specialisedin consultancy and project management in thefield of strategic collaboration and alliances.Creating Profit Through Alliances is his thirdbook.Download your own electronic copy of this book at:www.allianceexperts.com/creatingprofit