Strategic Alliances – Part One

Compoundings Magazine
October, 2001
By Thomas F. Glenn, Petroleum Trends International, Inc.
and Kevin J. Fiala, Bywater Corporate Development

This two-part article, written by PetroTrends and its alliance partner Bywater Corporate Development Services, provides information on what alliances are and how independent lubricant manufacturers can use them to grow their businesses. Part I focuses on the concepts of alliances. Part II bring the issue home, and speaks directly to how independent lubricant manufacturers can make alliances work for them.

The lubricants business continues to move through a period of unprecedented change. One of the most significant changes, and certainly the one expected to have the most profound impact on the market, is consolidation. The number of major lubricant manufacturers has shrunk from 14 to 9 in less than 10 years. Virtually all of the consolidation has been the result of mega-mergers and more are expected. 

In addition to the impact of mega-mergers, the lubricants industry is being reshaped by the Internet, increasingly challenging lubricant performance specifications, new engine technology, step changes in base stock manufacturing technology, fill-for-life and extended drains, globalization, a softening economy, and other issues. With these changes come significant challenges for independent lubricant manufacturers. Independents are faced with more intense competition, compressed margins, fewer choices in base stock sourcing, and escalating costs, to name a few. But the changes also open the doors of opportunity for independents, and strategic alliances offer the keys to opening some of these doors. 
Strategic alliances are often a much more flexible, less risky and more cost effective strategy for independents lubricant manufacturers to pursue when venturing into new markets and products/services, and for broadening ones knowledgebase and improving performance than are traditional mergers and acquisitions.  They offer particularly attractive solutions when there are strategic gaps in critical differential capabilities that are too expensive or will take too long to develop internally.

Two of the most common reasons for forming alliances are to enhance growth and to gain access to core capabilities. And for these reasons, strategic alliances are being used widely, and at an accelerating rate. According to a recent survey by consulting firm Booz-Allen & Hamilton, more than 20,000 alliances have been formed worldwide in the last two years alone. In addition, more than 20% of the revenue generated from the top 2,000 US and European companies now comes from alliances, up from about 5% in the early 1990’s, with more predicted in the near future.

What they are and are not…

Forming successful business alliances starts with understanding what alliances are, and what they are not, and how they differ from mergers and acquisitions, key account management, and outsourcing.  A simple way to differentiate alliances from other business relationships is by looking at The Bywater Relationship Matrix in Figure 1 – a tool for evaluating how two companies trade with each other.

 
 
 
Whether you call it an alliance or a partnership, a useful definition for what alliances are is explained by Kevin Fiala, principal of Bywater Corporate Development Services as “The seamless operation of business processes to best apply the competence of partners for shared gain.  Fiala notes “alliances typically form when one company alone can not effectively fill the gap in serving the needs of the marketplace.”  

Alliances are fundamentally different from acquisitions and require a different level of understanding. Fiala draws from Bywater’s experience in both alliances and acquisitions, and notes, “while achieving control, acquisition brings to the buyer all parts of the acquired entity – both strengths and flaws – while alliances match strengths and balance control with collaboration.” As The Bywater Relationship Matrix shows, however, alliancing and acquisitions are not the only type of business relationships. Perhaps the other most talked about model is that of outsourcing.  Rather than debating which approach to a business relationship is best, however, PetroTrends and Bywater’s research on alliances has shown that alliances and outsourcing each have its place. The key question, therefore, is which one to use and when. A simple way of looking at this is to consider the strategic importance of the activity in question, and the firm’s competency to deliver it. This approach, shown in Figure 2, demonstrates that outsourcing is a potential relationship type in the preferred supplier category.

The best way to separate those candidates for outsourcing, as opposed to alliancing, is to consider their core role. For outsourcing, think managed for cost. For alliancing, think managed for value. Outsourced activities tend to be tactical in nature, of low complexity, for which there are many providers. In the lubricants industry an example of this could be an independent lubricant manufacturer providing contract blending/toll manufacturing for a major lubricant marketer. Alliance candidates, on the other hand, are those where the supplier has a direct impact on the strategic priorities of the buyer’s business, and where the mutual trust and knowledge required by the supplier to add real value to the customer cannot be replaced easily.

There are many cases of companies trying to go down the alliancing route with suppliers they should really be looking to outsource to.  Similarly, and more significantly, firms have outsourced activities that were strategic. Only later, do they find that their strategic objectives cannot be achieved, because they have lost the ability to direct activities that are needed to support them.

The Business Need

Identifying the business need for an alliance is the single most important, yet often most overlooked factor in determining the success of an alliance. The process of overlooking this pivotal issue typically plays out when one party – a customer for example, proposes an alliance. A supplier then agrees to enter into an alliance because they “feel” it’s the right way to go or because “it’s their customer” and there doesn’t seem to be an acceptable alternative response to the invitation. All to infrequently do suppliers enter into an alliance because they too see a compelling business benefit. Based on research conducted by PetroTrends and Bywater’s on alliancing, there are 24 critical factors for success in alliancing. Identifying and understanding the business need for the alliance is at the top of the list. As a result, before setting off on the alliancing journey, each potential participant needs to critically ask the question: Why am I doing this? There must be a clear understanding of what the business need is. For example:

• Developing new markets, products, or services
• Accessing new product innovation
• Funding constraints
• Broadening knowledgebase
• Reducing cost
• Controlling channels of supply or sales
• Locking competitors out of a relationship  

The other question to ask, before pulling away from the start line is: Am I ready, and are they? Distilling the lessons learned from alliancing experience in a variety of industries leads to a list of essential prerequisites for alliancing to succeed, as shown in Figure 3.
    

 
Adding to the prerequisites for success, we have found that alliances are most often driven by individuals and work best when not overly complicated. The principles of most alliance can be captured in two or three pages, frequently in a document as simple as a memorandum of understanding (MOU). Alliance agreements that consists of 20 pages and full of legalize frequently suggest underlying questions of trust and/or clarity of purpose.  Complicated agreements are all too often doomed for failure before the ink dries.

No pain, no gain…

Alliancing is also about shared pain to deliver shared gain. So before the pain starts, a foundation of shared goals and shared values is needed to assure shared gains. There are many ways to develop the shared goals. The single most important test of those stated goals, however, is that they fully align back to the goals of the individual organizations. Which often make each company’s strategic plan a good place to start in identifying shared goals.
By having each company write on one sheet of paper their objectives and critical success factors (for the company, not the alliance), a  “checklist” is created to ensure goal congruence. If the two statements of purpose are then brought together, areas of common interest, and conflict, can be identified. From this basis, a set of truly aligned goals can be developed for the alliance, which can lead to concrete targets.

Shared values is a topic which all too often goes into the “too difficult” box, and yet is probably the single greatest reason why alliances do not deliver the value they should. A cultural assessment is a good place to start. After all, if an entrepreneurial firm is trying to Tango with a hierarchical firm doing the Foxtrot, it’s good to know that up front.

So, What Next?

Whether you are about to embark, are on the road, or just pulling in for your first pit stop, the critical factor in alliancing is recognizing it is a journey, not a one off project. And to embark on a journey, you must have a map, and have shown it to your fellow travelers. As with all journeys, you are never quite sure what you will find along the way, even if you have a clear view of where you are heading. That is why establishing mutual trust, understanding and confidence with your fellow companions is key before ever setting off.

Part II of this series on alliances will speak to some of the destinations an independent lubricant manufacture can travel to.   

Copyright © Petroleum Trends International, Inc.- Bywater Alliance.  2002