Companies around the world are reshaping the global business landscape through partnerships and joint ventures. In the new environment, they can do things they couldn’t do as well or at all on their own.Hardly a week goes by, it seems, without news of another huge corporate merger or acquisition. But while headlines trumpet the mega-deals, such as British mobile phone operator Vodafone AirTouch’s recent conquest of Germany’s Mannesmann, a less heralded – though equally important – activity is also taking place. Corporations are forging strategic alliances and partnerships as never before. In doing so, they are radically reshaping the international business landscape. Alliances and joint ventures are nothing new. But never have they been so complex and wide-ranging, or so numerous, as today. An estimated 20,000 alliances were formed worldwide between 1996 and 1998. According to John Harbison and Peter Pekar, of US consultants Booz-Allen & Hamilton, they now account for more than one-fifth of the revenues of the 1,000 largest US companies. In Europe, the figure is closer to one-third.
   Why are big, successful corporations prepared to rely on “outsiders” for such a high portion of their sales? The answer is that the potential rewards outweigh the risks. Joint ventures and alliances enable companies to do things they cannot do as well, or at all, by themselves. Thus a firm may sign semi-exclusive agreements with its suppliers, as is common in the engineering and motor industries. Or it may team up with a local partner to gain access to a foreign market. It may even link with an industry rival to enhance its development prospects or achieve better profitability in a particular business.

If you can’t beat them, join them
Take the motor industry. The emergence of hydrogen-powered fuel cells, a new low-pollution alternative to the internal combustion engine, has caused carmakers to fall over themselves in order to gain a presence in the technology. General Motors and Toyota, the world’s largest and third-largest car makers respectively, have buried their usual rivalry to develop fuel cell technologies together. Ford and DaimlerChrysler, two other competitors, are also working together, having both purchased large stakes in Ballard Power Systems, a small Canadian company that has pioneered car fuel cells.
   The same trend can be seen elsewhere. Nokia, Motorola and Ericsson, the world’s three leading suppliers of mobile phones, collaborate extensively in setting industry standards for new technologies such as WAP, which allows phone owners to surf the Internet. They reckon they can all sell more phones by agreeing on a single standard than by splitting the market between several competing standards. Similarly, mobile phone companies are reaching out to software companies as handsets increasingly come to resemble mini computers. Ericsson recently agreed a joint venture with Microsoft, the world’s biggest software company, to use Microsoft’s CE operating system inside its phones. The arrangement suits both sides: Microsoft wants a presence in the up-and-coming mobile telecom software market but does not want to become a telecoms company; for Ericsson the opposite applies.
   Collaborating with a rival can be attractive in low-margin industries prone to overcapacity. By pooling their assets, companies can gain greater critical mass that can yield efficiencies of cost and scale. Chevron and Phillips Petroleum, two American oil companies, had this motive when they agreed in February last year to fold their chemicals operations into a 50-50 joint venture. “The synergy from the combined operations will reduce annual costs by 150 million US dollars. and improve the effectiveness of capital spending,” says Dave O’Reilly, Chevron’s chairman and chief executive. The savings, he adds, will come from coordinating purchasing and logistics, enhancing feedstock flexibility, optimising production scheduling, improving organisational efficiency and reducing staffing.

Strategic suppliers
For many manufacturers, building closer relationships with suppliers has become a key priority in the past 15 years. Here, the prime motive is cost-cutting: Larger orders create economies of scale and reduce costs of production. Companies that deal with relatively few suppliers can better guarantee supplies and also gain greater leverage with the suppliers. In turn, suppliers benefit from being better able to predict demand for their goods. Their closer proximity to the client can yield advantages such as cheap finance from the client’s bankers, as well as access to know-how in areas like information technology.
   A survey of British companies by Partnership Sourcing, a public-private consultancy, indicates that more than 80 percent believe supplier partnerships have a crucial impact on competitiveness. Stuart Mullan, president of the helicopter subsidiary of British engines group Rolls-Royce, agrees: “[They] enable operators to lower the number of products and quantity of each item in their inventory, leading to reductions in carrying, administrative and labour costs. The result is a significant increase in value for our customers.”
   Many large companies have introduced benchmarking systems for suppliers, and some help to fund suppliers’ costs of compliance. Some, like oil giant Exxon Mobil, offer financial incentives for suppliers that attain certain standards. There is, however, a downside. Many suppliers complain that big clients subject them to incessant cost squeezes that they cannot meet wholly through productivity improvements. Meanwhile, the general shift towards regional and global procurement inevitably means that some suppliers are left in the cold. When German chemicals company BASF decided a few years ago to find cost savings in its North American supply chain, the effect on suppliers was dramatic: their number was slashed from 10,000 to 14. The only way we could accomplish our goals was to have a smaller number of suppliers,” maintains Jim Wingo, a senior US-based BASF executive.
   Market forces suggest strategic alliances will continue to grow in popularity. Increasingly they will take the form of equity stakes in the junior partner – a token of mutual commitment as well as interdependence. This is already common, indeed practically de rigueur, in e-business. When Goldman Sachs, the US investment bank, entered the Japanese online brokerage market earlier this year, it did so by joining forces with three leading US investment funds to purchase a large chunk of stock in Monex, its chosen Japanese partner. Alliances of this sort are currently sweeping the IT sector, where big corporations rooted in traditional businesses usually lack IT expertise and need partners.
   The relentless focus on core business in recent years is also a factor. In the heyday of conglomerates in the 1970s and early 1980s, companies could find in-house expertise across a range of different businesses. Today, that is no longer the case. Focused companies must find partners if they want to venture beyond their core activities.
   This trend is reinforced by a growing interest among many corporations in providing services as well as goods. Ford, for example, last year declared its intention to become a consumer products company. Making this kind of leap will require nimble management and new skills, some of which will best be obtained from strategic partnerships. But finding the right partner is not always easy, and mistakes can be costly. It took Volvo, the Swedish car group, and French counterpart Renault several years and some expense to untangle their cross-shareholdings after investors rejected a planned merger, forcing the companies to unwind a comprehensive alliance. France Telecom had a similar experience when its Global One joint venture with Deutsche Telekom and Sprint of the US broke up last year amid lawsuits and recriminations.
   Companies, then, should take care when choosing partners. But for every alliance that goes up in smoke, many more succeed. A comforting thought for chief executives as they scout around for future partners.

Greg McIvor  
a business journalist based in Stockholm