Multipartner alliances are an increasingly common feature on the business landscape. Whether to join such alliances, however, is a difficult decision—and one that many companies may make without asking themselves the right questions.
Such alliances, known as MPAs, are particularly common in industries dependent on fast-changing technologies. The idea behind them is to link research and engineering efforts, pool investments and share marketing and advertising costs, all in hopes of creating a technology standard or platform around which huge new markets will arise for the products of the MPA's members. Some examples include the Video Electronic Standards Association, or VESA; the Joint Electron Device Engineering Council, or JEDEC, in the semiconductor industry; and the Wi-Fi Alliance in the high-speed wireless local-area-networks industry.
Risks and Rewards
- Part of a Team: Multipartner alliances are increasingly important in industries with fast-changing technology and big capital needs. Partners share resources and costs to develop new standards and to create new markets for their products. The Wi-Fi Alliance is a case in point.
- Jockeying for Position: After joining, however, companies often discover there is competition among members, as each tries to maximize its benefits while minimizing its investment; the rewards of Wi-Fi, for example, appear to have been shared unevenly. Rules set by senior partners also can chafe.
- Key Decisions: Companies face important issues in choosing the right alliance and in dealing with membership. One thing to consider: Big advantages can be enjoyed by members that join either late or early.
MPAs offer their members important benefits, particularly in industries where levels of risk, the need for product interoperability and the cost of R&D investment limit the ability of any single company to independently gain success. MPA members can share resources and costs while limiting the downside of their platform being ultimately rejected by consumers: Think Betamax versus VHS, or, more recently, HD-DVD versus Blu-Ray.
The risks of backing the wrong MPA are clear. But far less recognized are the risks and challenges that arise inside MPAs, which often feature hundreds of member partners whose individual objectives can clash. Through ruling boards, typically composed of a handful of powerful companies, MPAs effectively constrain the strategic options of partners by enforcing common rules for governance and operations that are not always in a partner's best interest. Among many risks that can arise, partners may find themselves subsidizing rivals if their proprietary knowledge—associated, for instance, with product design, core technology or production process—leaks to their competitors through the MPA.
The key for each company is to make sure that its investment in the alliance remains in line with the benefits. But this is a task at which few succeed.
The Wi-Fi Alliance, for example, is one of the more successful MPAs in recent years. The alliance, which was founded in 1999 and led early on by a handful of companies including 3COM Corp., Agere Systems, a spinoff of Lucent Technologies Inc., and Cisco Systems Inc., emerged victorious after a several-year battle with three rival MPAs, all competing to create the standard technology for wireless local area networks, or WLANs. Today, people use Wi-Fi to connect to the Web in homes and businesses, coffee shops and airports around the world. But a 2004 Gartner Dataquest report suggested that about 85% of the world-wide WLAN market was captured by only 20 of the alliance's 250 partners.
The Wi-Fi Alliance says it seeks to be fair to all of its participants. Karen Hanley, senior director of the Wi-Fi Alliance, based in Austin, Texas, notes that the distribution of market share seen in the Gartner Dataquest report is seen in many kinds of markets. She says: "We strive to offer the same opportunities to all of our members."
But the extent to which partners share in the rewards in any MPA largely depends on decisions they make at every step along the way.
What follows are five key decisions executives will face from the time they first consider joining an MPA, to when they should consider getting out. Our team drew its insights from original research and extensive interviews with industry experts, and a detailed analysis of the Wi-Fi Alliance.
TO JOIN OR NOT?
Some companies may be better off alone. When a company owns a superior technology and has exclusive market access, it may not need an MPA. Or executives may decide to establish a new MPA if existing alliances appear to give advantages to competitors.
A company should consider the direct costs and other burdens an MPA may place on it, and whether its budget and other resources will be inordinately strained. Partners can be asked to commit their most talented engineers to joint research, and even to share proprietary technology with other members. It is possible in some cases to participate at a reduced level of cost and commitment. But it's the companies that invest the most that tend to sit on MPA governing boards, controlling strategic decisions on such matters as product development and marketing, and setting rules and constraints for the rest.
Companies that can't justify a seat on the board or that balk at the idea of surrendering certain controls should seriously consider staying on the sidelines.
Dr. Lavie is an assistant professor of management at McCombs School of Business, University of Texas at Austin, and a senior lecturer at the Technion - Israel Institute of Technology, in Haifa. Dr. Lechner is the EMBA professor of strategic management and head of the Center for Responsible Corporate Competitiveness at the University of St. Gallen, in Switzerland. Dr. Singh is a professor of management and co-director of the Mack Center for Technological Innovation at the Wharton School, University of Pennsylvania, in Philadelphia. They can be reached at smrfeedback@mit.edu.
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