May 5, 2016
By Greg McGahan, PwC Deals Partner and US Alliances Services Leader
Peter Drucker once said, “The greatest change in the way business is being conducted is the accelerating growth of relationships based not on ownership but on partnership.” Like many of Drucker’s insights through the years this one holds true. Many executives, under pressure to find growth in emerging economies or in adjacent industry sectors, are finding that going it alone or pursing a merger or acquisition is either undesirable or untenable. Instead, they are opting to join forces with a partner via an alliance or joint venture.
At PwC we’re seeing this trend unfolding in real-time with many of our clients exploring partnerships as a mechanism for growth or creating competitive advantage. Our own 2016 CEO Survey further validates this emerging trend, with 59 percent of US chief executives indicating they are planning to initiate a strategic alliance in the next 12 months, a jump of 15 percent over 2015.
Here are some of the drivers behind the surge in interest around JVs:
- Access to new/emerging technologies and strengthening innovation: Companies often use alliances to quickly secure new technology and strengthen innovation.
- Access to new geographic markets/entry point for emerging markets: The increasing difficulty of rapidly gaining a presence in high-growth and emerging markets, combined with escalating execution risk and regulatory/operational issues, has led to a dramatic rise in the use of alliances in new or emerging markets. In fact, for some emerging markets—China in particular—the only way to gain entry is by partnering with a local company.
- Access to new customers: Building and growing a loyal customer base is important to any business. But as competition intensifies, getting through to new customers can be a challenge. Strategic alliances provide partners with a ready-made and receptive audience.
- Access to talent: As companies expand into new areas or develop new products and services, some of the skill sets they need may be in short supply. Rather than training internal personnel – or, worse yet, becoming bloodied in the war for talent – companies may opt to enter into an alliance with a partner rich in required capabilities.
- Strengthening brand or reputation: Joining forces with a partner that has a significant reputation in a particular area is a good way to gain “brand equity by association.” It’s important to note however that the reverse can also be true…meaning thoroughly vetting your potential partners is a critical step in the alliance journey.
- Sharing of risks and resources: Certain alliances are motivated by the need to divide up what are often significant upfront product development risks. They also provide a way for companies to share scarce functional expertise or resources.
- Access to new industries: As boundaries of industries blur and converge, CEOs expect cross-industry competition to accelerate. Another great insight from this year’ CEO Survey: nearly a quarter of CEOs said their business had entered or had considered entering the tech sector within the past three years. But jumping into a new industry can be risky. Joining forces with a partner is one way to test the waters and develop capabilities without having to build them from the ground up.
As competition and market changes intensify, we are likely to see a growing number of companies embracing JVs and alliances due to the ease with which they can deliver a range of benefits. Organizations that master the art of rapidly and smoothly entering into these types of arrangements will enjoy significant competitive advantage.
Access our new paper, Joint Ventures and Strategic Alliances: Examining the keys to success, for factors to consider when pursuing partnerships.
Greg McGahan is a Partner with PwC’s US Deals practice and the US Leader of Alliances Services. Connect with Greg on LinkedIn.