Managing Technology-Based Strategic Alliances between Large and Small Firms

Slowinski, Gene, Seelig, Gerard, Hull, Frank, SAM Advanced Management Journal

The Structure of the Study

This article is based on a seven-year longitudinal study of 50 strategic alliances. In 1987-89, in-depth interviews were conducted with operating managers on both sides of 50 alliances. Operating managers in large companies and the small companies responded to the identical 10-page questionnaire. In this way, we were able to observe each of the alliances from the perspective of both firms. To encourage candor, we guaranteed anonymity to our participants and ensured them that their partner would never have access to their responses. Of the 50 alliances, 21 were in the field of biotechnology, 21 in electronics, and eight in machine vision.

This study also included a three-year follow-up. We were able to contact 38 of the original 50 alliances. Of those, only 50% had survived the three years. The results reported in this article reflect the best practices identified during the seven-year study.

Introduction

The business world is innovative, frequently experimenting with new structures and relationships. Traditional strategies for growth and diversification that focused on mergers and acquisitions have been supplemented by a variety of joint-venture arrangements, leveraged investments, licensing and royalty agreements, and so on. Over the last 10 years, a new business relationship has become popular: strategic alliances.

Typically, strategic alliances are an attractive option when a large firm has identified a significant opportunity in one of its existing markets. In general, the large firm has most of the capacity needed to address the opportunity but lacks one critical element: technology. By teaming with a world-class small partner, the large firm hopes to participate quickly in the emerging market and gain a competitive advantage.(1)

To explain the goals and expectations of the two companies that undertake a strategic alliance, it is easiest to first state what the relationship is not. It is not primarily an equity investment. There are many instances where a large corporation takes a minority position in a start-up venture believed to have a technological edge in a promising new product or process. These investments are usually made by the finance department and have as their objective a high return on investment for a recognized high risk. Typically, many pension managers set aside a small percentage of their portfolio for these type of higher-risk investments. In almost all cases these relationships are financial, not strategic. The large company does not seek the small company's technology, nor does it want to involve itself in the operations of the small firm. At most, the large company will place someone on the Board of Directors to protect its investment. What is absent is an agreement to jointly exploit the success of the small company's research and development and the interaction of operating personnel in both firms.

If a corporate decision is made to pursue the strategic alliance option, exploratory discussions begin. The interests of the two parties are both complementary and conflicting.(2) They both want the technology, which brought them together, to succeed and become a marketable commercial product or process. Generally, each recognizes its own strength and weakness and the benefits of a synergistic relationship. On the other hand, there are clearly interests that are different. The small company wants various types of financial and nonfinancial assistance, yet wants to retain maximum independence. The large company wants to cautiously dole out funding and maintain close monitoring if not control of the effort it is supporting. These issues must be discussed and resolved or they will threaten the alliance.

A number of other issues are important as well. A thorough understanding and agreement by key management people of both companies on the objectives and ground rules for the alliance is a necessary prerequisite for success.(3) These discussions must deal with hard issues such as who will be in charge of R&D, production, marketing, and other functions; which decisions are to be made by each company; which decisions must be approved by both companies; and how disputes should be resolved. If there are either basic differences or too many minor differences, the whole question of whether to proceed with the alliance needs to be re-examined.

Partnering vs the Alternatives

It is worthwhile to review the evolution of strategic alliances. Not too many years ago when an established large company wanted to enter a new product line quickly or rapidly acquire a new technology it would "buy into" that technology by acquiring a small company that had successfully developed it. The process was standard and simple. The founders of the small company, who were also …

Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: Managing Technology-Based Strategic Alliances between Large and Small Firms. Contributors: Slowinski, Gene - Author, Seelig, Gerard - Author, Hull, Frank - Author. Journal title: SAM Advanced Management Journal. Volume: 61. Issue: 2 Publication date: Spring 1996. Page number: 42+. © 1999 Society for the Advancement of Management. COPYRIGHT 1996 Gale Group.

This material is protected by copyright and, with the exception of fair use, may not be further copied, distributed or transmitted in any form or by any means.