Factors to consider in selecting a strategic partner
In my column in the week ending October 20, I expressed my delight at the decision by the Ghana National Gas Company to enter into a strategic alliance by way of an international joint ventureship with a foreign partner for the development of gas infrastructure for Ghana.
In previous columns, I also stressed the need for the government to formulate the necessary policy prescriptions for the development of strategic alliances between local companies and their foreign counterparts for accelerated economic development.
Benefits of strategic alliances
Strategic alliances come in many forms, the most common of them are distributorship, licence, franchise, consortia with the most important of them being joint ventures. It is important to emphasise that a meaningful strategic alliance of any form holds enormous prospects for the economy. In the first place, it is a veritable vehicle for technology transfer, contributes to an increase in GDP, helps with skills development, and in the peculiar circumstances of our country, could be a meaningful vehicle for halting capital flight.
Reasons for strategic alliances
Due to the fact that most investors are not very familiar with the investment environment of the countries they intend to operate in, and also due to government restrictions, most investors prefer to enter into strategic alliances of some sort with well-established companies as a means of ‘‘testing the waters’’ as the case may be.
I often recall with pride the strategic alliance initiative of E.L Quartey Jnr during his tenure as Chief Executive of Ghana Airways with Ethiopian Airways. The strategic alliance resulted in code sharing between the two airlines and the use by Ghana Airways of Ethiopian Airlines aircraft maintenance facilities among others.
I have also advocated a strategic alliance of some sort between the new airline envisaged to be set up by the government and a well-established foreign airline.Instead of the government entangling itself with the purchase and operation of an aircraft for which it does not have the funds at the moment, it could set up an airline and enter into a strategic alliance with any of the local airlines or with an established foreign airline through code sharing, co-mingling of assets, block space agreements, pro rate agreements etc.
Beyond strategic alliances in the aviation sector, I could also envisage meaningful strategic alliances between local and foreign companies in other sectors of the economy, being the pharmaceutical industry, merchandising, the hospitality industry, vehicle distributorship and advertising etc.
I am also of the firm conviction that most of the state owned enterprises (SOEs) which are now moribund could have been salvaged through meaningful strategic alliances of some sort with local or foreign enterprises.
Reluctance for entering into strategic alliances
However, in spite of the obvious benefits of strategic alliances which firms all over the world are exploiting to maximise their profitability, it seems to me that many local companies are closing their eyes to the benefits of expanding their horizons through strategic alliances.
Most are always looking to the traditional methods of expansion through contracting bank loans and in some few cases, opening up through equity participation. It must be stressed that in an era of the dearth of investment capital, meaningful strategic alliances offer a good opportunity for business expansion and capital acquisition as has been demonstrated by Ghana Gas.
It is often the case that local businesses often express the morbid fear of being swallowed by their partners or losing control of their businesses altogether.
However, with good negotiations and a proper documentation of the management of a strategic alliance partnership, local businesses do not need to have any apprehensions of being swallowed up or losing their businesses altogether to their potential foreign partners.
Criteria for selecting a strategic alliance partner
The most important issue is for a business to take a number of factors into consideration in its selection of a strategic alliance partner so as to maximise the benefits to be gained from such partnership. In this regard, it is suggested by Professors John B.Cullen and Praveen Parbotech, acknowledged strategic business experts that companies which desire to enter into strategic alliances with local or foreign partners should take into consideration the following factors to guide them in selecting their strategic alliance partners.
These are strategic complementarity, selecting a partner with skills to complement its strategic alliance partner, compatibility in management styles, mutual dependency, avoidance of the anchor partner and the elephant and ant situation.
Other factors for consideration in choosing a strategic alliance partner involve a consideration of the differences in the operating policies of the partners and the ease or difficulty in cross-cultural communications between potential alliance partners.
Taking the totality of the factors enumerated for the selection of a potential strategic alliance partner, it is important for a firm to rank these factors in an order of importance to optimise its chances in the selection of its strategic alliance partner.
In my estimation, the most important consideration for the selection of a strategic alliance partner is to avoid an ‘‘anchor partner’’. This is due to the fact that ‘‘anchor partners’’ invariably hold back the development of strategic alliances. They often do not provide their share of equity or are slow in doing so.
Where an ‘‘anchor partner’’ is desired on board as a strategic alliance partner at all cost due to its strength in other areas, then certain precautions must be taken with regard to profit sharing and management.
Premium should also be placed on the avoidance of an ‘‘elephant and ant’’ situation in a strategic alliance. This is because when a firm enters into an alliance with an overwhelmingly dominant partner, there is the likelihood of the dominant partner eventually being swallowed up by the weaker partner. This situation was manifestly revealed in the alliance between Telenor of Norway and Telia of Sweden, both telecommunications companies which eventually led to the collapse of the alliance.
Another premium to be placed on the criteria for selecting a strategic alliance partner is the ease with which the partners in the alliance can communicate with themselves and also their cultural compatibilities. It has been identified by international business researchers that errors in communication or slow communication is a major contributory factor to the collapse of negotiations for joint ventures or even actual collapse of joint venture enterprises or difficulties in their operations.
Geringer in his book, Joint Partner Selection, cites the case of a joint venture enterprise between a Japanese company and the US aircraft manufacturer, Boeing, where the Japanese workers interpreted literally the agreement to produce fuselage panels to ‘‘ mirror finish’’. This was literally interpreted by the Japanese workers as polishing the metal to a mirror finish.
The difficulty in communicating among the alliance partners created problems for the alliance relationship.
It is also important for strategic alliance partners to harmonise their operational policies as much as possible with respect to such areas as accounting systems, HR policies, finance policies etc.
It has been noted that Israeli companies sometimes have had difficult times in reaching agreement with foreign partners on strategic alliances with regard to the observance of the Jewish sabbath.
This has particularly made it difficult for the Israeli airline, EL AL to partner other major airlines because of the strict adherence of the staff to the observance of the Israeli sabbath.
Seeking a partner with a compatible management style like its alliance partner also goes a long way in cementing the alliance relationship. It has been noted that the alliance between General Electric Company of Britain and Siemens of Germany failed because of their incompatibility. While General Electrical Company of Britain was perceived as a financiers company, Siemens was regarded as a pure engineering company. Having said this, it is important for local companies to keep in mind that meaningful strategic alliances hold a lot of promise for the development of the country due to its obvious benefits.
Most importantly, with the drying up of investment capital and the crowding out of businesses from the loan market by the government, local businesses might as well fix their eyes on developing meaningful strategic alliances to reap its obvious advantages. However, they should be wary of the pitfalls.
Meawhile, I wish to congratulate Coca Cola Ghana Limited on its successful licence agreement with Nichols Limited of UK for the bottling of the Vimto drink, likewise the Tulip Hotel at East Legon and Holiday Inn Hotel for their successful partnerships with Tulip and the Holiday Inn brands.
The writer is a lawyer with specialisation in international business law.
Email: guymilo@yahoo.com
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