Get Down to the Core of Things
The formation of business alliances soared during the 1980s as corporations united for competitive advantage . . . or so they thought. As increasing numbers of corporations experience disappointment, “de-alliancing” is becoming more commonplace.
Today, most corporations are focused on a few “core” businesses--that is, businesses with strong competitive positions, well-established product lines and excellent management. Core businesses come in two varieties: “foundation” businesses and businesses that are vigorous but not vital to the overall success or sustainability of the company.
Foundation businesses are the corporation. They are strongly linked to its profit objectives and have clear synergies with other businesses within the corporation. Typically, a foundation business is worth most to the corporation that owns it. For example the foundation businesses of Fluor Corp. in Irvine focus on engineering and construction; the company also owns coal and lead companies.
Investments in foundation businesses are generally most effective when structured as wholly owned investments rather than alliances. This is true particularly for short-term investments. Recognition of this principle should fuel de-alliancing during the 1990s.
The reasons for reserving ownership of a foundation business are many. One of a foundation business’ primary goals is to maintain its strong competitive position; thus, protecting the key secrets to its success is vitally important. In contrast to wholly owned businesses, alliances present a high risk that competitive secrets will leak. For years, U.S. manufacturers pioneered consumer electronics technologies; now the U.S. consumer electronics market largely belongs to foreigners. Zenith, for example, is the last major U.S. television manufacturer.
A second goal is to continually improve the economics of the foundation business. While there are some counter-examples, a wholly owned investment can provide far better operating performance than is typically available within an alliance. It is easier to share operating skills and process knowledge within a corporation than across the borders of an alliance.
Finally, the corporation will be very dependent on the foundation business in the long term. Wholly owned investments improve sustainability and reduce risks more than alliances, where a mismatch could jeopardize some aspect of the business’s long-term future. An ill-fated AT&T;/Olivetti alliance hurt the foundation business of both companies, as neither was successful in marketing the other’s products overseas.
Despite the preceding caveats, alliances can be appropriate for foundation businesses in some instances. Long-term investment strategies for foundation businesses position the corporation for the future and sustain profitability and growth. Alliances are often needed for expansion, providing the corporation with quick access to emerging technologies, new geographic areas and/or new customers. For example, Merck gained initial access to new pharmaceuticals, and Hewlett-Packard opened a new geographic market by forming alliances.
However, at some point, an alliance in a foundation business should probably become wholly owned. (Both Merck and Hewlett-Packard have increasing equity positions in their initial alliance partners.)
As today’s long-term investments become tomorrow’s short-term investments, corporations should recognize the advantages of wholly owned investments over alliances and work toward converting the alliance.
