Academic journal article The McKinsey Quarterly

Coffee and One Way to Boston

Academic journal article The McKinsey Quarterly

Coffee and One Way to Boston

Article excerpt

More service companies are forming alliances

For room service, call Pizza Hut

Should you share your brand or your assets?

But sometimes car fumes and breakfast don't mix

Partnering in service businesses is now so widespread that it is almost taken for granted. Passengers travelling on United flights anywhere in the world are offered Starbucks gourmet coffee in a dual-branded cup. Baskin-Robbins ice-cream shares premises with Denny's family restaurants. Mail-order merchant L.L. Bean provides Federal Express delivery to its customers. United Airlines and Lufthansa coordinate their airline schedules and frequent flyer programs and place their logos side by side in international advertising campaigns.

In an expanding array of service businesses, managers are discovering that alliances can be an effective way to strengthen brands and improve economics. These alliances come in a smorgasbord of flavors: co-branding, co-marketing, code-sharing, licensing and distribution arrangements, strategic outsourcing, and more. Yet despite the attractiveness and popularity of partnering, our work with numerous service businesses suggests that as many as half of all these alliances are failing to live up to expectations, delivering neither a competitive boost nor higher profits. Partnering is turning out to be much more difficult than many companies anticipated.

An analogy can be drawn with the pitfalls and success factors in crossborder alliances.(*) Many of the same conditions apply to successful service alliances. The companies taking part should agree on objectives; they should offer complementary strengths; they should agree in advance on a detailed business plan and on how the alliance will be managed; and, because alliances need to adapt to changing circumstances, they should build flexibility into their agreement. But because of the importance of brands and the complexity of many delivery systems, service alliances also involve some distinctive challenges of their own.

As these alliances ripple through industry after industry, managers confront three critical questions: How do service alliances create value, and do they make sense for my business? What types of service alliance should I consider? And, most important, what do I need to think about in developing a partnering strategy and managing an alliance?

Why partner?

Service companies first acquired a taste for alliances in the late 1980s, when stiffer competition forced them to rethink their strategies. In the United States, airline deregulation, for instance, led to sustained price competition and overcapacity, from which the industry has yet to recover. In the quick-service restaurant business, most of the prime sites had already been taken, costs were rising, and fierce competition between existing players drove down returns in what had previously been a vibrant segment.

As many service businesses matured, sluggish demand, rising consumer expectations, and outdated cost structures exerted new pressures on companies that had once enjoyed rapid and profitable growth. In response, most players sought temporary relief through cost-cutting. However, the more far-sighted realized they needed to find fresh ways to improve and differentiate their services in order to create superior value for customers and shareholders. Alliances emerged as an answer.

The appeal of a service alliance is that partners retain their independent brands - and, in most cases, their financial control - while they simultaneously raise revenues or cut costs. Revenue grows when partners improve the services they offer and reach more customers. Cost savings are achieved by sharing assets or elements of the business system, or by capturing operating efficiencies through the outsourcing of certain activities. The challenge is always to ensure that the coupling of the service delivery systems supports - and preferably enhances - the operating efficiency and effectiveness of each partner's core concept. …

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