Join Anil Gupta for an in-depth discussion in this video Deciding to go alone or partner, part of Designing Growth Strategies.
- Whenever a company contemplates expanding into a new line of business, it must address one major challenge: how to build, acquire, or gain access to those capabilities which are essential to the new business, but are different from those which underlie the company's current abilities. Strategic alliances can be a possible solution to this challenge.
Other possible solutions include building such capabilities from the ground up, or acquiring a company which already has the requisite capabilities. Take the case of Starbucks Frappuccino beverages. Starbucks has sold freshly-made Frappuccino drinks in its stores since 1995. Over time, the company's management concluded that there could also be a potentially large market for Frappuccino beverages sold in prepackaged bottles via grocery stores.
If Starbucks could successfully realize this new opportunity, it would yield significant growth for the company. Doing so, however, posed at least two significant obstacles. Starbucks had no bottling plants, nor any experience at operating one. Starbucks also had no sales and distribution network to get the product to the grocery stores.
Building these capabilities from scratch would have required enormous capital investment and needed years to reach national scale. Given no assurance that selling Frappuccino bottles through grocery stores would actually succeed, such investment would also have been very risky. Starbucks leaders concluded that a strategic alliance with a company such as PepsiCo could be an extremely effective solution to this dilemma.
This is what they actually did, and to this day, the alliance continues to thrive. Starbucks and PepsiCo bring highly complementary strengths to this alliance. Starbucks contributes their brand name, logo, package design, and product formulation. In turn, PepsiCo contributes strengths in bottling, distribution, and sales. Both companies excel in their respective capabilities.
Moreover, for both companies, these capabilities are already in place, obviating the need for new investment. In short, the risk-reward ratio for this alliance is extremely favorable. Could a merger between the two companies have been even better than a strategic alliance? Highly unlikely. Both companies have significant other businesses outside of bottled coffee beverages.
There's hardly any commonality or complementarity between these businesses. Thus, a merger would merely create a bigger conglomerate without yielding additional benefits. In short, for both Starbucks and PepsiCo, a strategic alliance is the best possible approach to exploit the potential of Frappuccino beverages sold in prepackaged bottles via grocery stores.
Abstracting from the Starbucks case, we can derive the following conclusion about the relevance of strategic alliances when diversifying into a new growth opportunity. Strategic alliances should be viewed as one of three avenues by which a company can access the capabilities that are essential to the new opportunities, but different from those underlying the company's current activities.
The other two avenues are: building the needed capabilities from scratch, or buying a company which has these capabilities. Strategic alliances make sense when the risk-reward ratio associated with them is better than the risk-reward ratio associated with the other two avenues. It is also important to remember that because strategic alliances require ongoing collaboration between two or more independent companies, whether or not an alliance succeeds depends also on several other factors, such as: choice of alliance partners, the governance structure through which the alliance will be managed, agreements regarding the roles and responsibilities of alliance partners, and early investment in building trust among the alliance partners.
Lynda.com is a PMI Registered Education Provider. This course qualifies for professional development units (PDUs). To view the activity and PDU details for this course, click here.
The PMI Registered Education Provider logo is a registered mark of the Project Management Institute, Inc.
- The growth imperative
- Identifying opportunities for growth
- Assessing and choosing among the growth options
- Implementing the chosen growth strategy
- Organizing and leading for growth