Fast alliances are the key to dot-com success
Dot-coms wanting to thrive in the fast-paced e-business world should consider an alliance that will allow them to manage risks and costs.
To thrive in today’s fast-paced e-business world, dot-coms are feeling an increased pressure to align or consolidate. No single dot-com company can do it all. As technology and business continue to change at an increasingly rapid rate, alliances have become a crucial weapon in the battle for a competitive edge. Increasing competitive pressures require companies to develop new strengths and deliver products and services quickly and at a lower cost. In this complex environment, strategic alliances allow companies to develop products and rapidly expand their markets while managing risk and costs through sharing resources.
Yet, making partnerships last over the long term is not an easy undertaking. Statistics indicate that nearly 78 percent of mergers and acquisitions fail within the first two to three years from inception. Taking these alliances global is even more challenging– taking at least two to three times as long to create versus a domestic alliance. At least half of these alliances fail.
As my research of more than 235 global companies across more than 60 industries has proven, the primary reason for this failure is cultural and personality incompatibility. Of the 22 percent of mergers and acquisitions that survive, the key to their success may be found in a well-constructed, post-merger integration strategy that plans for the cultural integration of the two companies. Unfortunately, less than 10 percent of integration planning generally addresses the cultural and people issues, which could account for the abysmal success rate of mergers and acquisitions.
There are a number of critical steps dot-toms can take to set their alliances on the course for success. Here is a look at some of the most important points to consider:
1 ) Partner selection criteria.
Many of the alliances in the dot-com world are focused on acquisition because they address the major concern of these companies-market share and revenue increase. As a result, there is no time for the back and forth of criteria modification that takes place in other types of alliances.
With dot-com alliances there has to be a clear and concise understanding of what the upside will be for the acquirer, and what the extent of integration will be for the acquired. A common mistake in dot-com alliances is the failure to clearly articulate up front the value proposition of the alliance. While it is not essential that the goals of each partner be the same, it is critical that each partner be committed to a shared outcome.
Consequently, the best approach is often the portfolio approach, meaning that the acquired company is left alone to do what they do best. The acquiring company must be quite clear in what they want to achieve.
2) Cultural compatibility.
For companies partnering with foreign businesses, it is critical that they ascertain cultural compatibility. Language differences are obvious barriers, but there are other cultural stumbling blocks that can impact a dot-com alliance.
In the deal-making process, much of what is negotiated is focused on the transfer of migratory knowledge-what a company agrees to transfer. Included here is the contract between partners, technology value, capital investment, number of products sold, and license fees-all to be deliberately moved across company boundaries. However, rarely does the negotiation process consider the transfer of a company’s intrinsic knowledge.
Consider how a company talks to its customers or rewards its employees. Or look at the process it uses to analyze competitors or the layout of its production facility. While this is all valuable know-how possessed by the company, it is rarely included in the contract and rarely paid for when this knowledge is transferred. Referred to as “embedded knowledge,” it refers to how a company does business.
Success in cross-cultural settings requires knowledge and understanding of the cultural differences in the way information is communicated, and applying these understandings appropriately. Because communication is interpreted according to the rules of each culture, it is essential that companies understand the realities of doing business in different regions. To avoid opportunities for misunderstanding and potential relationship failure, companies need to study the cross-cultural expectations that influence communication.
For example, in negotiating projects with China, U.S. companies have learned that embedded knowledge transfer has the greatest value for the Chinese. This is significant when you consider that generally companies only value and negotiate for migratory knowledge transfer. For one U.S. company seeking access to the Chinese market, the lack of experience and knowledge of doing business in China resulted in much dissatisfaction in the U.S. organization, and eventually the decision to withdraw from the venture.
Failure of the U.S. company to understand the realities of doing business in this region resulted in the unintended transfer of embedded knowledge to China and a strong feeling of being taken advantage of. Knowledge of the cultural differences influencing expectations would have prepared the U.S, company for the Chinese approach-which is that a great deal of information must first be transferred to them by the U.S. partner, especially embedded knowledge, before they will enter into a long-term commitment. Eventually the U.S. company pursued the project in India with partners that had transcended the cultural barriers and could transact in a way the U.S. company recognized. As a result, the company was able to limit the knowledge transfer to predominantly migratory knowledge.
3) The formula.
The formula addresses how the acquiring company handles itself internally as well as externally. Do they know who the internal stakeholders are? Who are the external stakeholders? What about the other partners or companies with whom they do business? What will be the impact on all of these parties?
Since the time scale is so compressed, there is no time for begging for resources to support such activities. Resources must be addressed and available up front or someone else will take the market opportunity and run with it. At this point in the e-commerce game it is a “land grab”-those who move first and fastest will win.
For many dot-com companies, the main measure of success has been an increase in revenues. But now dot-corns should be considering prospective dates for profitability as well as customer synergies and market share.
Because there is no time for extensive surveys, it is also important that the metrics be concise, gaining an understanding of the customer acquisition costs and how the alliance will assist in that area. As such, one of the key differentiating factors for the winners is to reduce their customer acquisition cost while simultaneously growing their customer base.
Negotiations must be streamlined into a well-understood approach. For example, Cisco (see sidebar above), which provides networking solutions for the Internet, knows what gap in their product line the acquisition will fill, the potential return on increased market share the acquisition will generate, and how the acquisition will enable them to keep competitors out of the space. The price is almost not as relevant as those strategic issues.
Negotiations cannot be lengthy and personal issues must be taken into account. For example, Cerent, whose equipment is a building block in voice and data networks, was acquired by Cisco for an astronomical sum. However, one of the key issues of the acquisition was Cerent’s 280-plus workforce. The CEO of Cerent was very concerned that his people be protected, so a clause indicating that all personnel decisions would be made jointly between Cisco and Cerent was inserted into the contract. When you look at the relative size of these two organizations, it becomes clear that Cisco knew exactly why they wanted Cerent; therefore Cisco was willing to close the deal quickly and give Cerent employees what they wanted.
E-businesses will increasingly turn to fast alliances as the strategy that will enable them to thrive in today’s fast-paced business world. But with the vast majority of alliances failing to deliver on their promises, dot-coms would be wise to follow these critical steps. it may mean the difference between eating or being eaten.
Larraine Segil is CEO of Los Angeles-based Larraine Segil Productions, Inc. and The Lared Group, an international consulting firm. You may reach Segil at 310-556-1778 or via
e-mail at lsegil@aol. com. Visit her website at www.larrainesegil.com.
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