Creation of Value in an Alliance

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Creation of value in an alliance
Alfred Griffioen

Introduction

In the article 'Creating Profit Through Alliances' I have
argued that the strategies for competitive advantage
as described by Porter and Treacy & Wiersema need
some adjustment. Three generic strategies emerged
here: increasing your relevance for customers,
offering a unique product, and achieving cost
benefits. Particularly the first two yield a sustainable
competitive advantage. One method to execute these
strategies is by alliances, and for each strategy a
number of alliance forms can be proposed.

This article 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 of tactics to rid themselves of unwanted promoters, collectors and
salespersons.

Customers will pay attention to your product if your message is relevant to them at
that moment (see Figure 1). This means that the promise held out by your brand,
and its elaboration in products, service, marketing communication or distribution,
connects to their actual need.

Figure 1. When does an online ad get noticed?

Alfred Griffioen - Creation of value in an alliance 1

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Brands are the carriers of customer relevance. A brand need not necessarily be a
registered name with a logo. Even a trade name, a family name or even the name of
a region can be seen as a brand. Consumers group products and services under
such a brand name and attribute value to it. Customer relevance is therefore
measured per brand.

Relevance is also one of the four pillars under the Brand Asset Valuator of Young &
Rubicam1. Various researchers have –partly on basis of this model– studied how the
different components of brand value relate to a company's financial results. All
studies emphasise the predictive value of relevance and brand stature for financial
results.

These studies always measure relevance on a relative scale. This means that one
brand is compared to 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 brand's profitability2. 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 customer need.
This will happen if their actual need is answered by the promise that your brand
makes, and how this is fulfilled in products, services, distribution or your marketing
communications (Figure 2). Customer relevance always starts with a clear brand
promise.

Portfolio Generic
management needs
Actual
Fulfillment of Customer
customer
your brand promise relevance needs
Distribution and Context /
communications Situation

Figure 2. Customer relevance increases to the extent that brand promise and actual customer
needs overlap

Every person has a number of generic needs: security, friendship, relaxation,
efficiency and success. Depending on the context or situation you are in, these
generic needs are translated into actual needs. Again depending on the situation,
one or more of these generic needs will be dominant, complemented by needs that
arise through a customer's expectations with respect to a certain situation. For
example, when spending the night in a hotel you do not expect anyone to enter
your room unasked (privacy), that drinks in the bar are charged to your account
(convenience), and that there is wake-up call service (efficiency). At higher-end
hotels you will expect a laundry or dry-cleaning service (give me comprehensive
solutions) and personal attention.

The other aspect is the brand promise and how this is fulfilled. If you want to have a
meal, that need will differ depending on whether you're alone or with your family. A
company's response to this may lie in the right portfolio management of the
products and services it offers. It also makes a difference whether you're in town or
in an amusement park, and a company's solution here lies in its distribution
management. And finally, in this particular case, you do not have this need for a
meal at each and every moment. Thus, being relevant means that companies must


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present you with their offer at the right time. Marketing communications and
personal sales are important means to achieve this.

Businesses that deliberately invest in relevance also try to flesh out that brand
promise: by formulating the promise, communicating the promise, and especially
also by living out this promise in different ways. BMW uses the slogan “BMW makes
driving great”. The company tries to sustain that promise by putting only truly well-
designed products in the market. For example, when all car brands had already
launched an SUV, BMW also had one in the pipeline, but it wasn't thought good
enough. It wasn't until BMW had thoroughly developed the X5 that they rolled it out
into the showrooms.

According to a Booz Allan & Hamilton article entitled ‘How to brand Sand’3, you can
differentiate your offering through the product or through the service that you
provide as a company. These company service ‘promises’ could be:

• supply reliability,
• applications knowledge
• assuming responsibility, e.g. for part of their supply chain process.

Christopher Lovelock, in his book ‘Services Marketing’4, gives 8 ways to differentiate
on service aspects:

• Providing information (e.g. about the products, how to apply them)
• Advising customers (tailored to their specific needs)
• Making exceptions (handling special requests, complaints, restitution)
• Delivery (speed, timeframes)
• Fulfilment (planning, flexibility, change orders)
• Invoicing (EDI, clarity of the invoice)
• Payment and payment conditions (local bank account, payment term)
• Hospitality (is the client welcome, how is he treated)

Both with commodity products and unique products you can apply one of these
differentiators to become a relevant supplier for your customers. This can lead to
differentiating brand promises such as: “We deliver on time”, “Clear contracts”, “The
best advice”.

Alliances can help achieve relevance for customers more quickly. The value of
alliances can best be quantified by considering the costs your own company would
have to make to accomplish a comparable boost in relevance. This is elaborated
further for the five basic forms of alliances that aim to enhance customer relevance.

Distribution agreements and franchising

These forms of collaboration each seek to increase the number of sales points for
your product or service. This can be in the form of your own shop, an Internet
channel, or by being included (as brand) in the assortment of a larger store. Your
distribution channels ensure that the customer encounters your products or services
more quickly and can purchase them more easily.


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Generally speaking, a distribution channel fulfils the following functions:

• Information: to gather and spread market research and intelligence
• Promotion: to develop and spread announcements about special offers
• Contact: to communicate with potential buyers
• Matching: to adjust the offer to a quantity that meets the needs of the buyer,
including assembly and packaging
• Negotiation: to reach agreement about the price and other conditions
concerning the offer
• Physical distribution: transport and storage
• Financing: applying capital to maintain stocks and incur costs before
payments are received
• Risk taking: to maintain stocks of products and invest in processes without
guaranteed sales.

If distribution takes the form of a distributor placing a number of the supplier's
products on his shelf and adjusting his purchase depending on the sales, this does
not meet the criteria of a partnership. There is hardly any risk sharing, and certainly
no joint operational management. This changes as soon as the supplier and
distributor decide to work together in marketing, sales and delivery. As a result, the
distributor will take a greater interest in the supplier's product or service. It may be
that the distributor, in return for taking a greater interest, will demand the exclusive
distribution rights for his region or customer group.

In case of franchising, the relationship becomes closer yet. Here, the distributor
enters into an exclusive bond with the supplier, no longer working under his own
brand name but only under that of the supplier. It is no longer or hardly possible for
the distributor to sell products or services of another supplier, and the
distributor/franchisee is bound to strict rules with respect to shop interior and
marketing communication.

For both exclusive distribution and franchising, the parties share in the risk that
sales may disappoint and thus not justify each other's efforts and investments. In
case of a distribution agreement the distributor holds the reins, and the supplier
will want to steer along through generic marketing. In case of franchising it is
generally the supplier that holds the reins, and the franchisee will want to steer
along with respect to his own sales area.

The value of a partnership for a supplier can be quantified by considering the effort
the supplier would have to make in order to set up an alternative means of
distribution that achieves the same effect. Relevant aspects to consider here are:

• elaborating a shop concept;
• leasing or buying and then furnishing commercial space;
• leasing or buying and then furnishing sales offices;
• hiring, training and managing sales personnel;
• conducting local marketing campaigns and developing sales promotion
activities;
• tending to the financing and possibly the storage of goods.

Working with one's own distribution is particularly an option if the sales activities
require little shop or office space, the work can easily be scheduled, and extensive
travel is unnecessary. In virtually all other cases, working with distribution partners


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or franchisees will be a cheaper option, even if these partners only spend part of
their time on the product portfolio.

From the distributor's point of view, the value of an (exclusive) partnership with a
supplier is that it enlarges his portfolio (for the quantification, see next paragraph),
it offers better marketing and sales support, and it enables him to set up a good
purchasing process. The advantages for a franchisee are even greater: he can
participate in a comprehensive and proven shop concept, will receive coaching in his
operational management, and only needs to concentrate on local marketing and
sales. This does come at a price, obviously.

Proposition alignment and collaborative offering

Portfolio management is an important means of increasing your relevance for a
target group. By including more special, complementary or even lower priced
products or services in your offer, you are substantiating your brand promise.
However, this need not necessarily be the offer of one single company; if two or
more suppliers decide to align propositions, or to refer to each other, or to
collaborate in the offering, they can achieve greater relevance for their market.

Yet to remain relevant, it is important that the portfolio displays some measure of
synergy. Thus, it wouldn't make sense for McDonald's to start selling vegetables,
but it would if they started offering veggie burgers. Also for a company like Office
Depot, portfolio management constitutes the core of their marketing policy.

By choosing for one or a few alternatives at most, rather than selecting all products,
the customer is offered a pre-selection. This saves the customer from making
complicated choices, and regardless of the precise purchase, the quality is
satisfactory. Combined with the availability of the products and the certainty of not
needing to go somewhere else afterwards, this makes Office Depot a relevant party
for many entrepreneurs.

Entering into a partnership may be an attractive alternative to developing and
producing or purchasing and reselling a product or service in-house.

If two businesses decide to align their portfolios and to refer to each other, this may
represent added assurance for the customer: he may assume that the supplied
products or services are compatible, or that he will, at the very least, be informed of
any necessary adjustments. This assurance is of value to the customer, and may
thus justify a higher price.

An alternative would be to calculate how much it would cost the company to
purchase the goods or services directly and to resell them. In case of goods one
should also consider the costs for storage and physical distribution, and in case of
services the costs of matters such as quality inspections and idle time/unused hours
of personnel.

If two businesses decide to collaborate in their offering, this yields even more value
for the customer. Provided all is specified properly, it offers the customer a
contractual guarantee that the two firms' products or services are compatible, and
that he is saved from having to coordinate the delivery. He is furthermore
purchasing from a larger entity, which offers greater delivery assurance. This may


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prompt the collaborating firms to increase the prices, or it can enable them to bid
on orders that would otherwise be beyond reach.

Here again, the alternative is to calculate what a company would have to do in order
to offer the entire product, if at all feasible. In purchasing and reselling part of the
offer, the company must either run greater risks, or must pay a higher price to
cover those risks. Moreover, such a construction often lays claim to working capital,
since suppliers generally wish to be paid for their part before the customer pays for
the whole.

Determining the value of collaborative offering is generally independent of the
chosen legal framework. It can be done through contractual collaboration, or in the
form of a new legal entity. The most important variance in calculating the value
concerns the risk of having to pay a substantial customer claim, whether or not
jointly with the other partners. However, under normal circumstances this risk ought
not to dominate the scenario when entering into collaboration.

Co-branding

Co-branding involves utilising the value of two different brands. Co-branding closely
resembles two other forms of alliances. If it concerns the combined promotion of
two different products, each belonging to a different supplier, in a single offer or in
one marketing campaign, then this is referred to as joint promotion. This is actually
not a form of co-branding but of collaborative offering.

On the other hand, it may be that two companies collaborate to develop an entirely
new product, such as moisturised shaving by Philips and Nivea. Another interesting
example is the collaboration between Biodermal and Davitamon to develop tablets
that care for the skin from the inside. This is an example of joint R&D as described
further on in this book. This need not necessarily result in co-branding; it might be
handier to market the product under the brand name with which the product is
most closely associated. If the other brand's contribution is only partly visible, this
could create some confusion.

Between these two extremes we find the two most common forms of co-branding5:

• Symbolic co-branded products: the product of one of the brands is
augmented with just the exterior features of the other brand, such as a cereal
that is linked to Disneyworld, or the Ferrari laptop by Acer.
• Ingredient-branded products, in which an ingredient, component or
technology of one brand is added to the other brand, with explicit reference;
for instance Dr. Pepper soft drink with NutraSweet or Liga Yobreak children’s
biscuits with Danone Yoghurt.

A number of aspects are important in co-branding. First of all, the brands should fit
together in terms of their values and appeal. The collaboration between Swatch and
MSN, which lets you receive messages from friends on your wristwatch, is a
successful match because both brands engage a young target group. The earlier
example of the 'fast' Ferrari teaming up with somewhat ‘nerdy’ Acer is not as good.
Since a brand's product portfolio supports the brand experience to a significant
extent, the portfolios should also fit together intuitively. Thus, a McDonald's sales
outlet inside a clothing store is not a good idea.


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A new product that is the result of two brands collaborating should primarily mesh
with the values of those brands, rather than with their other products. It wouldn't be
such a surprise if Hummer were to start making sturdy kids' strollers, even though
the firm mainly builds cars. Engaging in a collaboration may help improve the
plausibility of 'brand-alien' aspects in the customer's perception.

Philips entered into collaboration with, among others, Swarowski for the
manufacture of a luxury, crystal-studded USB stick. Their goal was not so much to
sell large numbers, but rather to adjust their respective positioning. The partnership
enabled Philips to enhance the status of its products, while Swarowski's association
with a high-tech company allowed it to upgrade its somewhat old-fashioned image.

Consumers often see one of the two brands as more important than the other. This
is termed brand dominance. This is generally due to the fact that one brand triggers
more associations in the consumer's perception, for example thanks to brand
familiarity, the promotion upon introduction, the function of the product, or the
distribution. Considering tablets with beneficial properties for the skin: should we
associate these with skin creams (such as Biodermal) or with vitamin pills (such as
Davitamon)? It may therefore prove 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 of the added brand. The
independent value of this can be calculated reasonably well using methods such as
the Brand Asset Valuator (see above). Usually, the added brand is used to highlight
certain aspects of the product. Accordingly, the added value should only be seen in
relation to this aspect.

Suppose, for instance, that the Disney brand on a DVD cartoon makes it possible to
ask a 50% higher price in comparison to other cartoon movies, then it might add
only 10% to a box of cornflakes. The reason is that the 'entertainment' aspect for
which Disney is famed plays a subordinate role with respect to cornflakes, where
other aspects dominate such as nutritional value, flavour and convenience.

In addition one must ask what the position of the added brand is in comparison to
the main brand. For Macbooks by Apple, for instance, having an 'Intel processor
inside’ may not carry as much weight as for a weaker computer brand such as
Toshiba.

Developing a unique product

Having a unique product is an important means of setting yourself apart on the
market and of keeping your competitors at bay. It actually means that you have a
small monopoly. This gives protection for higher pricing strategies, since there are
no competitors offering a similar product. Despite the lower demand for higher
priced products, this position is often very profitable.

A unique product always has a significant, not easily copied advantage when
compared to competing products. So this is not about a coffeemaker in a new
colour, a camera with a few more megapixels, or a mid-range car with a slightly
different design. This is about more than just 'differentiation'. Being different is not
good enough; the point is to be exceptional.


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Examples of a unique product are the Nespresso coffeemaker, a Harley Davidson,
Viagra, music by Elton John or the ‘beyond first class’ private cabins in the latest
aircraft operated by Singapore Airlines. To imitate such products would require the
right technology, patents, extreme creative efforts, and/or huge investments.

Many unique products are therefore protected in one way or another by intellectual
property rights: patents for technology, copyright for books and music, drawing and
model rights for design. These property rights ensure that competitors cannot copy
the product and enjoy the advantage of not having suffered the development costs.

A unique product will not remain unique for ever. Despite the protection of a
technology or model, new technologies can be developed that offer the same or
similar functionality. Patents expire and music becomes outdated. Changing needs
among consumers and businesses, or new legislation, can cause a product's
popularity to decline.

The point is therefore to run your organisation in such a way that it does not
produce a one-off unique product, but that you can constantly come up with
improvements and innovations. A unique product can result from leading the field
in certain competences, such as technological know-how, design skills or market
understanding. The point is to develop these competences further and to excel in
them, so that you can create unique products time and again.

Collaboration is an important means of ensuring that you have the right
competences and knowledge in-house. An example of a unique product as a result
of a collaboration is the Senseo coffeemaker. The Nespresso coffeemaker had been
around since 1986, but it never became a widely used product, partly due to its
pricing of 200-plus euros. Precisely because the Senseo was positioned in the lower
price range of 59 euros upon introduction, it became a unique product in a wholly
different market, namely that of the 'regular' coffeemakers.

There are basically two forms of alliances that can result in a unique product: joint
R&D and technology licensing. In the first case, different competences from the two
partner firms are brought together, and the risk primarily pertains to the actual
development process. For technology licensing, the firms conclude agreements
about the use of existing intellectual property rights. The two forms are discussed
below.

Naturally, having a unique product does not mean you can dispense with all kinds of
marketing communication. Collaborating with a number of good distributors is
essential, and they will need to be persuaded of the utility and uniqueness of the
product in question.

Findability on the Internet is also vitally important. A good example here is the
Checkout cashier system developed by the Amsterdam-based company Sofa. This is
a software application for Apple computers, developed out of frustration about the
sluggishness and lack of user-friendliness of traditional checkout systems.
When Sofa put the Checkout test version online, they noticed through the
discussions on Internet forums where most interest was to be found: among smaller
starting-up shops with just a few cashiers. In less than 2.5 years since then, some
3500 shops have purchases a license, 95% of them outside the Netherlands6. Unique
products, once they acquire some degree of name recognition, are therefore picked
out and promoted by the market itself.


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Joint R&D

In an R&D alliance, product development or innovation can be achieved if both
parties have something to learn from each other. The more knowledge the firms
share, the greater the chance of achieving success, but if there are no clear
arrangements in place with respect to sharing the revenue, the greater, also, the
chance that your partner will forge ahead on his own. This is particularly true for the
initial explorative phase in the collaboration, and less so during the subsequent
phase of marketing the invention or innovation.

An R&D alliance implies an interaction between:

• the structure of the alliance: this structure should offer both a partnership
form to share knowledge, but also protect against the partner's opportunistic
behaviour, and
• the breakthrough or innovation that is either sought or found: which of the
parties stands to benefit most, and who has the greatest influence on its
successful marketing?

The unpredictability of what the research will achieve demands a lot of flexibility
from the partners7. Often, the business model needs to be modified during the
course of the development process, for example because just one of the partners
stand to gain commercial benefit from a research result.

It has been studied to a slight extent how this process can best be managed. For
innovative ICT services, the 'Freeband Business Blueprint Method'8 has been
developed, which can seemingly be applied to other fields as well. It involves a
process in which information is added gradually (see Figure 3). In the first step, a
business model is sketched in rough outline using a number of basic questions
about the service concept, the technological architecture, the organisation and the
financial arrangements. This first step can be seen as a Quick Scan.

Phase 2
Phase 3

Acceptable Partner selection
distribution of tasks

Network orchestration
Acceptable profit
model
Value for service Outsourcing
providers
Joint network
Service provisioning
strategy
and processes
Viability
business model Version
Clear definition of
management
the target group
Customer value Branding
Appealing value
proposition
Trust

Quality of the
provisioning system Personalisation

Critical success factors Critical design factors

Figure 3. Freeband business blueprint method

In the second step, the rough sketch is evaluated in the light of six critical success
factors. The third step is devoted to the further refinement and detailing of the


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business model, with reference to critical design factors. Some of these factors,
such as staffing and network orchestration, may require some more explanation in
branches outside ICT.

Nevertheless, it remains difficult to determine the value of a joint research project in
advance, given the unpredictability of results. Timing plays an important role here,
too, since an invention that is patented just one day earlier by a competitor can
render one's own research entirely worthless. On the other hand it is possible to
estimate the effort it would take to find and hire and motivate people with the same
knowledge and experience as are made available by the partner.

Technology Licensing

In 2003 Henri Chesbrough introduced the concept of ‘open innovation’ in his book
‘Open innovation, the new imperative for creating and profiting from technology’9.
Chesbrough builds on what is known as the ‘funnel’ model, in which companies
start with a large amount of ideas of which just a small selection is elaborated, and
an even smaller portion ultimately reaches the market (Figure 4). The ideas that are
not elaborated into a product remain unused, and are sometimes even inaccessible
to others because they are patented.

Idea- Product Market
selection development introduction

Idea

Market

Products a re commercially
unsuccessful
Products a re
technically too complex
Ideas a re discarded

Figure 4. Usual 'funnel' for product development

Chesbrough's proposal is that companies sell their unused knowledge to other
companies, thereby generating extra income (Figure 5). They can also elaborate the
ideas in new start-ups. Conversely, they can buy technologies and patents from
other companies in order to achieve a shorter time-to-market for their own new
products.

Idea- Product Market
selection development introduction

purchasing knowledge
Ideas/technology
from outside Products/concepts
from outside

Idea Market

Products a re ommericially
unsuccessful
Products a re
technically too complex
Ideas a re discarded

Selling unused knowledge

Figure 5. 'Funnel' for product development according to Chesbrough's concept of open innovation

In most cases, technology and intellectual property rights are acquired through
licensing. In this form of alliance, you benefit from the knowledge, competences,


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technologies and perhaps patents of another party, or instead you make such
knowledge available. Chapter 5 takes a closer look at the settlement.

The Galapagos bio-technology firm is a typical example of open innovation. The
company develops biotechnology for new medicines, but is too small to process
that technology into medicine and to embark on the costly process of getting the
medicine approved through clinical testing in the US and Europe. So instead they
sell patents and procedures to partners such as Astra Zeneca, Eli Lilly and Janssen
Pharmaceuticals. Galapagos is generally remunerated directly, and subsequently
shares in the profits if a medicine makes it to the market.

The price payable for a certain technology will depend to a large extent on its direct
applicability, the number of parties offering similar technology, and the number of
potential customers. Since 2006, several large auctions of patents have been held
that attempted to bring together as many providers and potential customers as
possible, with a view to creating a more predictable market and more transparent
pricing processes. This could yield an initial guideline for comparable patents.
However, the vast majority of intellectual property rights are still traded privately.

Creating cost advantages

Enlarging your customer relevance or developing a unique product yields durable
competitive advantage. However, alliances can also be used to achieve cost
advantages, though these are often easier to copy. In this paragraph we discuss
three forms of alliances that are geared to costs: shared investment, reciprocal
hiring agreements, and unusual supplier risk.
Shared investment

In some cases scale advantages can be achieved by jointly investing in means of
production; for example, two construction companies that decide to operate a
cement factory together. Alternatively, parties may choose to merge a number of
supporting activities such as administration, personnel affairs or ICT (for companies
with offices in a shared building).

It may be advantageous to enter into a production alliance with one of your
competitors: if it means that you both stand to benefit from a cost advantage, this
will thrust both of you ahead of other competitors. A single competitor grows in
tandem with you, while the rest are left lagging behind. This form of alliance for
example occurs in the automotive industry, since setting up a production line is a
very costly affair. Certainly outside the domestic market, sharing capacity is an
attractive option. For instance in the US, Toyota Camrys are finished in a Subaru
plant in Indiana.

Another example is the collaboration between the two low-cost airline carriers Air
Asia and Jetstar. This alliance is primarily targeted at defining the new generation of
single aisle aircraft, as well as the joint procurement of these aircraft. Where the
traditional airline alliances focus on commercial agreements and passenger benefits
such as loyalty programmes, this alliance aims to cut costs by sharing some
operational functions. Air Asia and Jetstar want to make sure that the new airplane
types, which will be around for 40 to 50 years, are designed in a way that fulfils
their own requirements.


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Generally speaking, this type of collaboration does not carry much risk, and the
important risks that do occur can be insured against. Depending on the settlement
structure, there is a risk in the exploitation of the shared investment, yet that risk
would be far greater if one of the parties were to make that investment on his own.
The joint operational management, particularly of shared service centres, tends to
be a trickier aspect. Many managing directors of shared service centres get a taste
for independence and start to focus more on expanding their activities than on
achieving the lowest possible costs for the partners.

The value of collaborating in this way is usually easy to calculate: the costs of
investing directly and of investing jointly are generally quite transparent. The only
hard part is to estimate the extra efficiency achieved by scale size. One should also
take into account that joint purchasing often enables the negotiation of larger
discounts.

Reciprocal hiring agreement

In a reciprocal hiring agreement, the partners share their resource pools in order to
achieve a better staffing. This may involve consultants with a particular expertise,
but also installation technicians with diverse abilities. Deploying each other's people
is settled applying market-level rates, but the collaboration gives partners the
advantage of not needing to keep extra people on the payroll with a view to peak
periods. This form of collaboration is distinct from shared investing in that there are
hardly any costs up front, and the collaboration is easily arranged, also in terms of
operational management. The main condition is to share information, particularly
regarding planning.

The value for both parties is better capacity utilisation, and being able to keep fewer
people on the payroll.

A good example is the collaboration of TNT in Germany. In Germany there are
around 150 regional mail service providers, all working within a confined
geographical region. This is a viable business model, for with a lot of local
governments, banks and insurance companies present, most of the mail is sent
within the region. The mail services accept all mail from their clients and use the
nation-wide firm Deutsche Post for the portion destined for outside the region.

TNT has bundled a large number of these mail services within a network, the Mail
Alliance. This alliance mainly competes with Deutsche Post and has the purpose of
distributing mail that has to be delivered outside the borders of an individual
region, to other parties within the Mail Alliance. All participating companies work
together on the basis of one IT system and one set of sorting rules, which enables
the ‘roaming’ between the networks. The conditions to have one’s mail delivered in
another region are similar for all participants.

Unusual supplier risk

Contracting-out work to a supplier generally does not qualify as an alliance. It
usually concerns a purchasing transaction, with the service or product and its costs
specified beforehand. Thus, there is no question of shared risks or joint
management.


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There are some exceptions, however; for instance in outsourcing, where the client's
personnel are transferred. The result is that the supplier's production capacity
increases, without any solid guarantees of higher sales. The collaboration is based
on the assumption that the supplier has more options of putting people to work
than the client. The client transfers a large portion of his knowledge and work
processes to the supplier that puts his business operation at some risk. He will
therefore want to have a certain measure of operational control in return.

Public-private partnerships sometimes entail an above-average risk for the supplier
as well. Imagine, for instance, a construction company that not only undertakes to
build a road, but also to be responsible for its maintenance, the financing, and its
operation. This clearly creates a strong dependency on the commissioning public
authority, which for example decides on the surrounding infrastructure and thus
can influence the number of cars using that road. On the other hand, the multiple-
year contract means that the public authority has a lot less control over the
operation of the road, and will therefore seek assurances with respect to its
operational management.

Here, too, the cost advantages of collaborating are generally easy to calculate,
taking into account the 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 certain activities. The specificity of these activities makes it possible to have
several suppliers bid against each other in a public tender process.

The extent to which commissioning companies are open to the tendering of work in
the form of alliances differs per country. When we look at the construction of
infrastructure (roads, gas pipes, water purification facilities), this appear to be quite
common in the United Kingdom. In the Netherlands, the Ministry of Finance has set
up a knowledge centre about public-private partnerships, and this approach is
gradually becoming more familiar. In Germany the commissioning party tends to
divide the work into small functional parcels, in order to contract these out at the
lowest possible cost.

From normal value to top value

In the paragraphs above we discussed three strategies
for differentiation, and how various forms of alliances
can contribute to competitive advantage. Bundling
resources results in a new and more powerful business
model.

In their book ‘The Profit Zone’10, Adrian Slywotzky and
David Morrison describe a number of generic 'sources of
profit protection' that allow a company or partnership to
durably set itself apart from competitors. The main
competitive advantages are identified as:

• controlling a standard (as Microsoft does with Windows);
• controlling a value chain (Intel captures the most profitable part of the
computer chain with its chips);
• having market dominance (e.g. Coca Cola's omnipresence);
• owning the customer relationship (as Dell does, as PC assembler).


Alliance experts

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 one's own.
These models are discussed below.

Controlling the standard

Certainly in a market (segment) that doesn't 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 a hybrid car engine.

If a standard has been set already, it may be an option to work with the party
controlling that standard to develop distinctive supplementary products, such as
accessories for the iPhone.

Controlling the value chain

To draw profit from controlling a value chain, there are various options:

• Collaborate with a partner that owns the same scarce resources in the value
chain, and to make price agreements where possible and permitted. For
example, two companies with comparable technology decide to develop this
further and sell it together.
• Collaborate with a partner that owns other scarce resources, in order to
control the chain together.
• Collaborate with a supplier to obtain alternatives for scarce resources, and
help spread these in the market. For example, if process operators for the
chemical industry are hard to come by, then offer acquisition guarantees to a
training institute in return for developing a dedicated training program.

If you are the party supplying volume to the market but not earning much in the
process, then make compensation arrangements with links in the value chain that
benefit strongly from your volume; for instance with the instalment company that
installs and maintains your products.

Looking at the construction sector, we see that a large share of the costs is due to
the required steel. For steel company Corus, a subsidiary of Tata, a considerable
portion of its turnover derives from this, yet with on average just a slight profit
margin. The profits are made elsewhere in the chain, by the distributors and
processing companies. Corus developed a response to this situation with what is
termed Ympress steel. This steel is produced specifically for laser cutting, requiring
fewer corrections when processing the steel further. By offering training courses for
operators of laser cutting machinery, Corus is able to penetrate the value chain to a
far greater extent than previously, and at the same time gain a position from which
it can advertise the advantages of Ympress steel.


Alliance experts

Market dominance

If you wish to pursue market dominance, there are several ways to go about it:

• Entering into licensing agreements, so that a product or brand name is used
in multiple ways. The Disney corporation is very good at this, with Donald
Duck, Mowgli and many other characters appearing in many different
products.
• Finding a partner with a large production plant or distribution network.
• Collaborating with a partner that supplies complementary products. The
combination of strong brands can generate additional purchasing power, as
demonstrated for example by Karl Lagerfeld and H&M.

This strategy characteristically entails using the channels or name recognition of the
other party, who generally also stands to gain from it. However, the products or
brands should be compatible to form a relevant combination for the buyer.

Owning the customer relationship

Owning the relationship with the customer offers such advantages as being the first
to hear of customer wishes and developments, being able to directly influence the
customer, and being able to directly promote other products. Companies that do
not own customer relationships to any significant degree can opt for the following:

• 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 CRM
(customer relationship management) systems, with distribution or with
marketing. For many food companies, collaborating with marketing expert
Proctor & Gamble would be a major help.
• Collaborate with parties that can help you supply or service the customer in a
flexible and customised manner, and so to boost your relevance for that
customer.

Many distribution channels have a customer relationship to some degree, and can
be a good partner here. But bear in mind the importance of making agreements
about exclusivity and customer ownership (see Chapter 5).

Recurrent turnover

Recurrent turnover, as through razor blades, printer cartridges and vacuum cleaner
bags, but also maintenance contracts for a variety of appliances also represent an
excellent source of profit. As it can be quite challenging for a company to supply
both the initial product and the disposable items, this is an evident area for
partnerships to be forged. Where it concerns complementary products (for instance
rechargeable batteries and the recharger, paint and paint brushes), agreements can
be made between the complementary suppliers to ensure that these products are
compatible. Although this requires coordination and perhaps some after-care, this
can constitute an important and distinctive sales argument.

Little beats the pleasure of knowing for sure that two components will work
together; for example that a drill bit will fit your electric drill, a DVD will play in your
DVD player, and that your Samsung hard disk will interface with your Dell computer.


Alliance experts

Many of such potential problems are solved by international standardisation
committees, who will formulate an ISO standard that defines the diameters, shapes
and network protocols, which all manufacturers will then apply to their products.
Other industries deliberately choose not to: because HP ink cartridges only work in
HP printers, HP can afford to market the printer at very low prices, and then make a
profit selling more expensive cartridges.

Network-related profit

The value of a network is equal to the number of users squared11. This already
became clear at the 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 10 there were 45 fax connections available. With the advent of the Internet,
all sorts of networks, market places and user groups could emerge and grow
rapidly. Examples are sites such as YouTube, Hyves and LinkedIn.

The business profile site LinkedIn has some 90 million users, while the more
informal profile site Facebook has over 400 million (as per 2010). Then there are
sites such as Flickr, Myspace and Hyves, and Plaxo and Naymz for the business
world. Such (business) sites allow one to upload some sort of CV and to establish
network links with your relations. However, users tend to engage with just one or
two networks, which means that not all relations can be reached.

If two or more parties bundle their customers or connections in a new network
concept, the immediate result is a much wider reach of relations for the customer.
This increases the value of the network, but can cause a loss of Internet traffic and
hence of advertising revenue for certain providers. The impact will be less for larger,
more established players than for newcomers.

Conclusions

Alliances are an effective way to create value. By combining the assets and
capabilities of two or more companies, this value can be more than these companies
can achieve individually. Comparing the partnership with the stand-alone situation
helps to quantify the added value of the alliance. This is an essential aspect of the
business case and a necessary step in the negotiation process.

For more articles of Alfred Griffioen search on Slideshare or go to www.allianceexperts.com

References

1
Young & Rubicam Group, Brand Asset Valuator, 2003
2
Frank H.M. Verbeeten, Pieter Vijn, Do strong brands pay off?, Nijenrode Research Group working paper, 2006
3
Sam I. Hill, Jack McGrath, and Sandeep Dayal, How to brand Sand, Strategy+Business, 1 April 1998
4
Christopher Lovelock, Services Marketing, Prentice Hall, 7th edition, 2010
5
Lisanne Bouten, Co-branding, A brand partnership and a new product, Universiteit Delft, 2010
6
Uit irritatie geboren kassasysteem grote hit bij Amerikaanse retailers, Financieele Dagblad, 6 april 2009
7
Hakan Linnarson, Paterns of alignment in alliance structure and innovation, 2005
8
Timbert Haaker e.a., Freeband Business Blauwdruk Methode, 2004
9
Henri Chesbrough, Open innovation, the new imperative for creating and profiting from technology, Harvard
Business School Press, Boston, 2003
10
Adrian Slywotzky and David Morrison, The profit zone, 2002
11
Robert Metcalfe, Law of Metcalfe


Creation of Value in an Alliance

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