Insights on Alliance Management, Accountability, Sarbanes-Oxley, Marketing Theory and Leadership Competencies

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EDITOR'S NOTE

The in-depth section of EBF--which you will find in the next 26 pages--represents a change of style and pace for the reader. While the preceding EBF debate dealt with a specific theme, here we broaden the focus to look at a variety of topics that affect businesses across Europe and around the world. Leadership, the impacts of culture on accountability, the evolution of marketing thought and the impact of financial regulations are among the subjects discussed.

Smarter ways to do business with the competition

Culture and managing expectations are the key to developing successful business alliances

Every company needs to co-operate with rivals at some point during its business lifetime. Increased levels of local and international competition, coupled with smarter and more discerning customers, require more sophisticated and efficient ways of doing business. In addition, many regulated or protected industries have restrictions on cross-border activities or mergers.

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Alliances and partnerships with peers and competitors offer a credible alternative to flying solo. The idea seems easy and straightforward: pooling ideas, resources and capabilities gives managers and companies added strength and power. Yet with strength comes complexity, balancing power, decision-making and group dynamics. Alliances among peers and competitors pose many issues, including:

* Alliance structure (organisation, governance and ownership)

* Managing members' expectations

* Creating the alliance content

* Fostering a healthy alliance culture

* Managing external networks

* Measuring performance

Companies that enter into strategic alliances thus encounter many dilemmas. We have summarised the key issues into six categories of 10 dilemmas:

Structure

Dilemma 1: what sort of entity should be created to manage the alliance?

Dilemma 2: how should power be distributed among the members?

Expectations

Dilemma 3: how do you resolve differing visions of the alliance's evolution?

Dilemma 4: how do you build trust among actual and potential competitors?

Content

Dilemma 5: how do you create a separate identity for the alliance while maintaining the individual identities of members?

Dilemma 6: what should each member give up doing?

Dilemma 7: should members be involved with each other outside alliance business?

Culture

Dilemma 8: how should the alliance deal with cultural differences, whether national or business-related?

External networks

Dilemma 9: how should alliance members deal with their external networks?

Performance

Dilemma 10: how do you quantify the gains from alliance involvement?

This paper discusses how Star Alliance, the world's largest airline alliance, has dealt with these 10 dilemmas.

Star Alliance constitutes one of the most complex alliances in the world, with 15 air-line members from 16 countries: Air Canada, Air New Zealand, ANA (Japan), Asiana Airlines (South Korea), Austrian, bmi (United Kingdom), LOT Polish Airlines, Lufthansa (Germany), SAS Scandinavian Airlines (Denmark, Norway and Sweden), Spanair (Spain), Singapore Airlines, Thai, United (US), US Airways, and Varig (Brazil).

Structure

Dilemma 1: what sort of entity should be created to manage the alliance?

An alliance can be formed as an independent entity or as dependent on its parent companies. When only a few partners are involved, dependence can be the simplest solution, reducing the need for separate systems. BP and Mobil adopted this approach for their European oil business joint ventures, essentially operating the refining venture as a BP entity, and the lubricants venture as a Mobil entity (Bamford et al. 2004).

The road to finding the right entity for Star Alliance took many turns. Its founders began with a series of bilateral agreements involving key functions such as marketing and operations (for example, code-sharing of flights). Various other bilateral agreements followed until five airlines--Air Canada, Lufthansa, SAS, Thai and United--sought a closer engagement by launching the Star Alliance network in May 1997.

Although its founding members chose an independent identity, Star Alliance did not become a separate legal entity until January 2002. In its early days, the Alliance was run as a virtual organisation with functional committees staffed by member representatives. Establishing a permanent base for activities was difficult with its members based around the world.

The virtual organisation then evolved into Star Alliance Services GmbH, a separate management company based in Frankfurt. Registered as a limited liability company, 65 full-time management staff handled the strategic responsibilities for Star Alliance. Decision-making and implementation for Alliance-wide projects and issues thus became easier. The new management company formalised Star Alliance's ownership structure. Each member airline became an equal shareholder in the new company, a significant improvement from the early days of loose and informal ownership.

Dilemma 2: how should power be distributed among the members?

As the largest political alliance in the world, the European Union operates on the basis of unequal votes, weighted by population, currently with a veto for each member. In contrast, many alliances prefer the option of one member, one vote. Star Alliance opted for a system that ensured all members had equal decision-making and voting powers, regardless of strength and size. Equal powers were matched by a consensus-driven approach to decision making. However, this approach proved too slow and inefficient as Star Alliance grew.

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Ironically, a critical mass also evolved. No committee representative wanted to be the person vetoing a decision. Members decided against the alternative voting structure of 'decision by majority', for fear that it would lead to cliques, in-fighting and defections. The establishment of the management company in 2002 evolved the structure a step further, handing decision-making powers to the CEO and directors. However, the new organisation still relies on the input and experience of its member airlines.

Solutions for structural dilemmas

* Build organisation structure according to needs of the alliance members. Be prepared to evolve this structure as members' needs and market conditions change.

* Establish a fair system of decision-making and governance.

* Define the ownership structure of the alliance among the members to ensure full commitment to the alliance.

Managing different expectations

Dilemma 3: how do you resolve differing visions of the alliance's evolution?

Star Alliance had a clear and common vision from day 1: to contribute to the long-term profitability of its members beyond their individual capabilities. "We wanted to assist carriers to improve their bottom line through collaboration, to go beyond the results they could achieve on their own," said Jaan Albrecht, CEO of Star Alliance.

Taking stock of this vision, the members conducted research on customer demands from a global airline network, and found three guiding principles. First, customers want global access. United does not fly to South America, but can provide this service through its alliance partners. Second, customers want their status to travel with them, so that frequent travellers with recognised status in United would receive the same level of premium service when they travelled with United's partners. Finally, they want a seamless travel experience, so that if a passenger is travelling to multiple destinations, his or her checked baggage would be forwarded automatically.

Yet although the partners seemed clear with the Alliance vision, it was not uncommon for different expectations about the Alliance's future potential to develop. As CEO, Albrecht had to manage members' expectations as some thought the alliance would eventually lead to a mega-carrier. The prospect of losing individual identities contradicted the Alliance's original vision, and created unnecessary internal tension.

Communication was vital in ensuring that all partners understood the alliance's strategy and vision. Having the same expectations of what Star Alliance would and would not do directly affected members' level of commitment. To discourage the idea of eventual merger and to increase mutual trust, Star Alliance also set a rule that no member could own more than 5 per cent of another member.

Dilemma 4: how do you build trust among actual and potential competitors?

Developing trust is important in any business relationship. The five founding partners of Star Alliance set the example for openness and trust. Members appointed credible leadership for its projects, and delivered continuity in project management. The marketing of the alliance was a case in point. The marketing committee needed strong leadership to create and launch a global brand from scratch. The task fell to Louise McKenven, head of marketing communications at Air Canada when she was appointed to chair the committee. Air Canada brought a level of trust and credibility to leading the Alliance marketing effort. As Air Canada was the 13th-largest carrier in the world, the other alliance partners saw it as non-threatening and neutral.

Top management involvement also helps to build trust. Corning is renowned for its expertise and success in managing alliances. James R. Houghton, Chairman of Corning Glass Works, has talked about the importance of top management participation (Parkhe, 1998). He cited a personal example in which his company created a joint venture with Ciba-Geigy and where he insisted that both bosses be part of the new board. Their visibility signalled to employees in both firms the importance each partner placed in the joint venture.

Another key success factor to an alliance is the lever of social relationships among mid-level executives who do the bulk of alliance-related work. Investing time in formal and informal activities helps build personal and business relationships among members. This level of trust can be critical when the alliance has no physical structures, such as offices of headquarters, as was the case in Star Alliance's early days.

Solutions for expectation dilemmas

* Ascertain members' motivations for joining the alliance by defining their mission, vision and strategic objectives

* Keep communication lines open internally within the organisation and externally with fellow alliance members

* Establish strong leadership from day 1

* Cultivate trust by ensuring continuity of management teams

Content

Dilemma 5: how do you create a separate identity for the alliance while maintaining the individual identities of members?

Star Alliance carefully negotiated and enforced a series of common branding devices, and gradually increased them over time. Star Alliance intended to be a brand in its own right that would enhance and complement the member airlines' brands. Preserving individual identities, through staff, surroundings and service, was paramount. Members believed their individual brands functioned best at the level of point-to-point travel, whereas the Star Alliance brand was more relevant for multi-sector travelling using a number of airlines. Star Alliance compiled a set of guidelines for members. The 'Member Communication Requirements' became an essential marketing tool for airlines to promote the Star Alliance brand in a consistent way.

The process of collectively building the Star Alliance brand was long and hard. However, the carriers quickly derived some halo effect from the Star Alliance association, especially smaller carriers. Being affiliated with quality airlines like Singapore Airlines and Lufthansa is a big boost to a small player like LOT Polish Airlines. Even for Singapore Airlines, another relatively small player in the global airline industry, being a Star Alliance member means global reach and brand exposure.

Dilemma 6: what should each member give up doing?

For members to derive maximum benefits from the alliance, each must give up something that the alliance makes redundant. The pharmaceutical industry is quite heavily reliant on alliances to help in new product development. Research and development costs are steep, and pharmaceutical companies are reluctant to take on research in an area where they do not have expertise.

Star Alliance members gave up their less competitive offerings (mainly routes) and relied on other members. Code-share agreements enabled the carriers to offer their passenger routes under co-ordinated times in certain markets. Lufthansa stopped its services to Australia in 2000, and instead relied on its partner Singapore Airlines for coverage. Similarly, Singapore Airlines made London and Frankfurt its main European hubs where it relies on partners bmi and Lufthansa to serve onward destinations across Europe.

Consolidating airport lounges became a sticky subject for members. Airlines insisted on keeping individual lounges in strategic or home markets, but agreed to consolidate in third markets. For Air Canada, the decision to integrate depended on the strength of airlines' market presence in different markets. Where there was no dominant presence of a member airline, it made sense to promote the Star Alliance brand more strongly by having one lounge. This also generated cost savings and efficiency. But individual lounges remained the norm in cities where dominant carriers were present (for example, Frankfurt with Lufthansa, Chicago with United, and Montreal with Air Canada). It was difficult to give away 'sacred cows' that have received high brand investment from the individual carriers.

Customer feedback also indicated a strong preference for experiencing carriers' individual personalities. 'They don't want to fly 'vanilla' airlines', explained Alliance members. For example, customers choose to fly Thai because of the Thai experience; its Royal Orchid Service extends a traditional Thai welcome that includes a fresh orchid for its female passengers. Thai sees the importance of keeping this experience intact for its key markets.

Identifying other touch points for passengers remains a challenge for the Star Alliance carriers. For example, should napkins on board members' aircraft be branded 'Star Alliance' or with the individual carriers' names? The potential to generate big cost savings from having a consolidated order of napkins must be weighed against maintaining the carriers' individual identities.

There are still many opportunities for co-operation, particularly in maintenance, fleet purchasing and operation, and industrial training of employees. The effects of 9/11 on the airline industry have prompted members to work more closely and negotiate as a group, for example with insurance companies, where an alliance can deliver strong bargaining power.

Dilemma 7: should members be involved with each other outside alliance business?

In some alliances, members strictly keep to alliance business and refrain from getting involved in their partners' other activities. Star Alliance takes the opposite approach. Its members openly help each other to leverage partners' strengths. For Air Canada, co-operation within Star Alliance helped them win some key battles. Air Canada was once denied route rights to Rio de Janeiro because of unrelated competitive issues between its fellow Canadian company, regional jet manufacturer Bombardier, and the latter's Brazilian competitor, Embraer. Through the lobbying support of alliance partner Varig, the Brazilian government saw that the two battles were separate, and eventually awarded the route rights to Air Canada.

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Solutions for content dilemmas

* Strike a balance between building the alliance brand and maintaining individual brands/identities

* Exercise discipline in enforcing guidelines to build the alliance brand

* Actions speak louder than words; ensure that your products/services deliver against the promises made by your marketing.

Culture

The secret to overcoming the above seven dilemmas largely rests on solving the eighth, culture.

Dilemma 8: how should the alliance deal with cultural differences, whether national or business-related?

The inspiration to form a strategic alliance often comes from the boardrooms of top management. The bosses quickly grasp the idea and see the potential benefits. But top management commitment is only the tip of the iceberg. The wider organisation, from managers to frontline staff, must also embrace this idea to deliver success.

Creating and maintaining a healthy alliance culture is tricky. It involves balancing people of different backgrounds, sentiments, expertise and agenda. Members face multiple challenges in creating an umbrella culture that encompasses different geographies, nationalities, functional departments and even personal biases.

For many alliances, the cultural differences that exist make it more difficult to build trust. Many firms that forge alliances invest in programmes that develop cross-cultural understanding among their staff. When Corning was involved in a foreign fibre-optical joint venture, it sent all of its participating employees on language and cultural training courses (Parkhe, 1998). NEC, a Japanese company, has instituted a similar programme for its employees moving to western countries, with English-Japanese simulation exercises, classes highlighting differences in customs, and even the teaching of English jokes.

The Star Alliance leadership was acutely aware of their cultural differences, but pushed hard to overcome national prejudices and preferences. However, two questions still remained: first, how could the Alliance leadership motivate and engage all levels of its individual organisations to behave in a more holistic way? And second, how would new members adapt to the resulting culture, which they did not necessarily have the chance to form, but must embrace if they were to join the Alliance?

Gaining complete buy-in meant addressing cultural differences. United saw its North American culture as a frustration as well as an advantage. United was often inclined to move things as quickly as possible, but realised this was not always possible. Other cultures had a different sense of time. Yet advantages came when it was United's turn to lead and projects were handled efficiently.

Cultural differences were also manifested through personal tastes or biases. In the early days of Star Alliance, committee representatives often played the 'culture card' to delay decisions when in fact the issues were borne out of personal tastes. Agreeing the Star Alliance logo was a case in point. Black was chosen as the main colour for the logo execution, as it was a neutral colour and was a good fit with all of the members' corporate colours. But two members did not agree, citing cultural reasons: black is a negative sign, a colour of mourning and death. The team experienced delays before reaching consensus. Despite the problems, the Star Alliance members still considered the diversity of cultures as a strength in that different perspectives were brought forward on issues. Members gained a multi-faceted view, a key requirement in a business as global as airlines.

The second question, implementing the Star Alliance culture to new joiners, was equally crucial. Members ensured a match in culture and personality between potential members and the Star Alliance. For example, reconciling the cultures of Virgin Atlantic and the Star Alliance members, if Virgin was hypothetically considered for membership, would seem impossible. Virgin's culture of 'challenging the establishment' conflicts with Star Alliance's raison d'etre as essentially a grouping of the world's 'establishment' carriers.

Solutions for cultural dilemmas

* Engage all levels of the partner organisations

* Acknowledge cultural differences (whether geographic or business-related) in order to find the optimum way of working

* Match prospective new partners' cultures and business goals with the alliance in order to maintain a healthy alliance culture.

External networks

Dilemma 9: how should alliance members deal with their external networks?

Star Alliance saw the importance of striking a balance between the necessary structures to manage these networks, and enough room for members to differentiate themselves and exercise their autonomy. Star Alliance knew the diversity of its members is a major source of strengths and value. Figure 2 sketches the network of partners and alliances, inside and outside the airline industry, to which the Star Alliance and its members are exposed. Members also protected the reputation of Star Alliance from third-party activities they could not control.

Solutions for dilemmas involving external networks

* Play a leading role in implementing strategies for dealing with third-party alliances and networks

* Maintain the right balance between putting structures in place to …