Four Questions for Appraising Your Alliances

Over the past four years, many of the United States’ geopolitical alliances have been remade with bewildering speed. It’s no surprise that many of those changes created an uproar — some of these relationships dated back a century or more and seemed sacrosanct, until they weren’t.

Source: Four Questions for Appraising Your Alliances

 It also prompted Stephen Walt, the Robert and Renée Belfer Professor of International Relations at Harvard University, to cut through the noise with an article in Foreign Policy titled “How to Tell if You’re in a Good Alliance,” which is instructive for business leaders as well as diplomats.

Walt is a pragmatist, so the first thing he points out is the unspoken assumption behind the uproar: that each of a nation’s existing political alliances is actually worth maintaining. “Surely this is not the case, for all allies are not created equal, and the value of any commitment is likely to wax and wane over time,” he writes. “Wise countries choose their allies carefully and do not treat any of them as sacred and inviolable.”

This is as true in business as it is in international relations. Corporate alliances are a means to an end, and they involve costs and obligations. Accordingly, corporate leaders, like the heads of nations, should never take the value of their partnerships for granted. Toward that end, you can conduct a fast review of the value of your company’s alliances by asking the following four questions, derived from the short list of attributes of a good ally that Walt offers in his article.

Does your partner make a meaningful contribution to the alliance? This is a key question when reviewing a partnership. It’s also one that torpedoed the 2009 alliance between Suzuki Motor Corp. and Volkswagen. Volkswagen wanted to gain greater access to the fast-growing Indian market through Suzuki, and Suzuki wanted access to Volkswagen’s hybrid and diesel technologies. The problem, claimed Suzuki chairman Osamu Suzuki less than two years after the companies bought stakes in each other, was that the technology Suzuki sought wasn’t forthcoming. Suzuki didn’t need the technology that VW was willing to provide, and VW wouldn’t provide access to the technology that it did need. If your partner hasn’t made the contributions it promised, you don’t have a good ally.

Is your partner stable? A partner who is at risk strategically or financially can do your company more harm than good. Take Boeing’s troubles with the 737 MAX, which led it to shut down production of the plane in January 2019. This move endangered the company’s supply partners, especially Wichita, Kansas-based Spirit AeroSystems Holdings, an $8 billion company that derives 80% of its income from Boeing. Spirit not only was prepared to support Boeing’s pre-crisis build rate of 52 aircraft per month, but also to accommodate a gradual increase in its production to 57 aircraft. Thus, the problems of Spirit’s biggest partner become Spirit’s problems. The stability of your partners is a key ingredient in the valuation of alliances.

Are your partner’s interests compatible with your company’s interests? The interests of partners can diverge over time — and in some cases, come into conflict. FedEx and Amazon offer a prime example. For years, Amazon contracted with FedEx to deliver the goods it sold — to the benefit of both companies. But as Amazon’s annual shipping volumes climbed into the billions of packages and it sought to attract customers through discounted shipping offers, its annual shipping costs ballooned (to $27.7 billion in 2018). Unsurprisingly, the company started building its own delivery capabilities under the rubric of Amazon Logistics, and soon it was delivering nearly half of its own shipments.

Initially, FedEx’s leadership appeared unconcerned that the interests of one of its largest and most powerful allies might conflict with its own. On the company’s second-quarter 2018 earnings call, CEO Fred Smith said that he didn’t see Amazon as a direct competitor. In June 2019, however, FedEx decided not to renew Amazon’s contract for air shipments, and two months later, it announced that it wouldn’t renew Amazon’s ground shipping contract. When the interests of allies diverge, you need to reconsider the alliance, even if it does produce $900 million in revenue.

How well is your partner treating your company? The idea that your allies will always treat your company with benevolence and respect is comforting but not necessarily realistic. In fact, alliances often founder on broken promises — and sometimes outright deceit. Witness the experience of Danone Group, which formed a joint venture with Chinese beverage company Wahaha Group in 1996. It started well: Wahaha is a popular brand in China, and thanks to the joint venture, China quickly became Danone’s third-biggest market. Then, in 2005, Danone discovered that Zong Qinghou, CEO of Wahaha, was running a parallel set of businesses selling Wahaha-branded products outside of and in direct competition with the joint venture. Lawsuits followed, and Wahaha agreed to buy out Danone’s share in the joint venture in 2009. It turns out that “trust, but verify” is as important a rule for corporate alliances as it is for political treaties.

Companies enter alliances in good faith and with high hopes. But like everything else, the conditions that prompted the alliance in the first place are likely to change over time. When they do, leaders need to respond by reappraising alliances and, when necessary, altering or ending them.

A new year is dawning. Do you know the state of your company’s alliances?