As companies grow, they often find themselves looking to other companies to create new advantages. Strategic partnerships are mutual agreements in which companies establish objectives and goals to accomplish together. While this concept is by no means new to the world of sales, it’s important that partnerships are actually strategic.
Not all partnerships are created equal. Some partnerships are doomed to fail from the start. And some require only a bit of finessing to set both parties up for success. Entering into an alliance that’s harmful—or even worse—can drastically impact a company’s success.
To illustrate why strategic alliances fail—and how you can prevent them from doing so—let’s take a look at some examples.
1. AOL and Time Warner
Back in the days when the “dotcom boom” was still a thing, AOL and Time Warner combined their businesses into what’s generally considered the worst merger of all time. On paper, the deal made sense: Time Warner would profit from AOL’s online presence (which was once enviable), while AOL would reap the benefits of Time Warner’s cable network and content.
Suffice to say, this is not how things went. Spoiler alert: The dotcom bubble burst just months after the deal closed—and the entire economy went into recession. As you may recall, AOL’s business spiraled out of control, culminating in a goodwill write-off of some $99 billion in 2002, and a nearly $206 billion devaluation of stock. Yikes.
So, what’s the takeaway here? A Fortune article illustrates the concept of transient advantage, a phenomenon in which the initial capabilities that make an organization successful erode and are replaced by a subsequent form of competitive advantage. AOL relied heavily on the promise of broadband (which, at the time, only 3 percent of the country had). Because it built its business on monthly subscriptions—a model destined to implode—the failed merger was essentially inevitable.
What’s more, from the onset, the merger was doomed to fail because of cultural differences. On one hand, AOL represented an aggressive identity, compared to Time Warner’s corporate, conservative culture. Not only is it important to understand the marketplace, it’s essential to ensure that your organizations are compatible in both product offerings and culture. Make sure that both companies are on the same page and that everyone is working to accomplish mutual goals.
2. Cisco and Motorola
In 1999, Motorola and Cisco formed a joint venture, Spectrapoint Wireless. They spent $300 million to acquire fixed wireless assets of another telecom company and agreed to spend $1 billion to become the leaders in fixed wireless services. However, after just one year, the partnership was called off. Why? Because there was no one to sell to.
So why exactly did this strategic alliance fail? For starters, the companies were blinded by ambition—and believed in an industry that never took really took off. It’s easy to fall in love with an idea of creating value. However, it’s essential to consistently consider the prospects of the alliance.
True strategic alliances are built around a mutual challenge. Some alliances provide organizations with a new set of skills or capabilities. For example, partners may provide each other with a product that complements the other’s own offerings. Other alliances create strategic advantages to increase competitiveness or enter new markets. Regardless, it’s important to always consider the end goal of your alliance.
3. Staples and Office Depot
Just last year, Staples attempted to buy out its competitor, Office Depot—and failed big time. While the $5.5 billion deal represented a bright future for Staples, the merger failed after antitrust issues surfaced, and the Federal Trade Commission (FTC) denied the companies the option. The FTC stated that there was a likelihood that the partnership would lead to higher prices and lower competition.
Staples now owes Office Depot $250 million in breakup fees. What does this high-profile failure symbolize? That, once again, it’s essential to consistently evaluate the marketplace and understand the impact your partnership will inevitably make. Referring back to your plans and objectives enables organizations to redirect a partnership that has gone off course and avoid one that’s bound to tank in the first place.
To learn about companies worked together to achieve great things, read our post about examples of successful alliances between companies.