Restructuring Alliances and it's Effect

Topics: Joint venture, Parent company, Holding company Pages: 30 (5645 words) Published: March 30, 2014
Your Alliances
Are Too Stable
by David Ernst and James Bamford


Executives often
bemoan the instability
of their business
partnerships. But what
really makes them
hard to manage is
their rigidity.

JUNE 2005


/ \ almost every industry-from airlines
to oil exploration, from pharmaceuticals to semiconductors. In fact, we've found that the typical corporation relies
on alliances for 15% to 20% of Its total
revenues, assets, or income. While some
alliances are highly successful-Airbus,
Cingular, and Visa International, for
instance - many have a less-than-stellar
track record. The overall success rate of
alliances hovers near 50%, and the average life span of a joint venture is just five to seven years. It's no wonder executives
complain about their inherent instability. But, in fact, they've got it backward; most alliances are actually too stable for
their own good.
Organizations tend to use alliances in
uncertain circumstances - to enter an
unfamiliar market or to develop a disruptive technology, for instance-or in maturing industries as a step toward

consolidation. Because these ventures
operate in the midst of change, they
must continually evolve to succeed. Yet
their corporate parents routinely fail to
intervene to correct their (Performance
problems or address their exposure to
risk. Some companies wait too long to expand successful ventures; others defer shutting down alliances that have served
their purposes or have little hope of
being successful under the current ownership structure.
Corporations are missing an enormous untapped opportunity: A 2004 McKinsey survey of 30-plus companies
reveals that more than 70% of them
have major alliances that are underperforming and in need of restructuring. Likewise, our research indicates that JVs that broaden or otherwise adjust their scope have a 79% success rate, versus 33% for ventures that remain essentially unchanged. In China, where 133

BEST P R A C T I C E • Your Alliances Are Too Stable

most foreign investment has historically
taken the form of joint ventures, our colleagues surveyed the alliance portfolios of 30 multinationals and discovered that
top performers are twice as likely to have
restructured their alliances as underperformers are. Companies that overhaul a single large alliance can generate an additional $100 million to $300 million in annual income. It takes hard work to reap those benefits, however. For a host of reasons, retooling an alliance is far more complicated than restructuring a wholly owned business unit. But our work with more

than 20 major alliance restructurings
and our interviews on the topic with
more than 50 executives, including board
members and CEOs of many of the
largest JVs in the world, have revealed
some best practices.
We define an alliance as an agreement between two or more separate companies in which there is shared risk,
returns, and control, as well as some
operational integration and mutual dependence. As such, "alliance" is an umbrella term for a vast array of corporate relationships that fall between arm'slength deals and full mergers. The advice in this article is particularly relevant for large, equity joint ventures (where

the partners each contribute resources
to create a new company), complex nonequity alliances (where the partners may collaborate on marketing or development projects), and multiple-partner ventures; less so for straightforward contractual alliances.

pricing methods, closing plants, selling
assets and businesses, and combining
units for scale. But the story is fundamentally different for alliances. Many are weighed down by outdated strategies, are mired in governance conflicts between their parents, or suffer from a
lack of consistent performance scrutiny.
As a result, they perform much more
poorly than they could.
Consider a muitibillion-dollar joint
venture in the metals industry. Formed
in the...
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