Strategic alliances to boost growth

Last week, I mentioned the Ansoff Matrix and the four strategic options for growing a business it proposes.  What is clear from the matrix is that each of the options contains an increasing level of risk.  Several of the options will involve significant level of expenditure. Diversification can be expensive; as is the process of new product development.

With NPD you can spend fortunes on prototype products which never go to market.  It is estimated that James Dyson spent £2 billion on his electric car project before pulling the plug (sorry for the pun) on the concept.  Dyson, when announcing that the car wasn’t going into manufacture said that production would not be financially viable. I also suspect his experimental solid state battery technology was incapable of powering the vehicle.

One way to reduce the costs of, and to some extent the risk of business growth, is to enter an alliance or joint venture.  One wonders that if Dyson had viewed his electric car project as a joint venture with an existing motor manufacturer, instead of slagging them off at the concept launch, his car might have seen the light of day in the marketplace.

Dyson forgot the mantra, ‘No business is an island’. Businesses operate in complex markets where it is likely suppliers, distributors and retailers are shared.

If you are looking to expand your market, either geographically or by moving from commercial markets to consumer markets,, you may well need the expertise and knowledge of those already operating within your expansion target.

When creating new products you may want to spread development costs, or you may need specialist technical know-how.

Diversification is the highest risk and potentially the most expensive growth option for a business.  You may need guidance from those who already know the proposed product category.

At a strategic level alliances should add value by leveraging the optimal level of assets and competencies.

It is increasingly unlikely that a single business can keep all these assets and competencies in-house. ‘No business is an island’. Exclusivity costs.

A partnership or alliance may be the best way to maximise economies of scale.

So a telecommunications firm may choose to partner with an IT firm to create integrated systems.  Computer manufacturers partner with manufacturers of VDUs, processing chips and graphics cards. Car manufacturers share production platforms and car ‘chassis’ designs.

And it isn’t just in production that an alliance can create economies. You can build alliances with retailers, distributors and suppliers.

Alliances are not just for big multi-nationals. take the example of McKean Foods, a Haggis producer. McKean started selling haggis online and received lots of interest from the United States of America.  However, the USA bans imports of haggis as a measure against the spread of the disease Scrapie, which affects sheep.  this ban is completely non-sensical as McKean operates in the UK/EU where animal welfare and food standards regulations are amongst the most comprehensive in the world.

So as McKean Foods cannot export Haggis to the USA, clearly an alliance with a US manufacturer would allow growth through market expansion.

In modern markets there are the following motivations for alliances and joint vewntures:

  1. Globalisation: Many companies are now compelled to work on the world stage.  Globalisation has also led to shorted product lifecycles. the mobile phone market is a clear example of product lifecycle contraction. Contrary to the argument for Brexit, the world is becoming a smaller place and around the world nation states are joining forces to create economic blocs e.g. Mercosur and the South African Development Alliance.
  2. Assets and Competencies: As stated above, a single company cannot be good at everything.  It is almost certain you are going to need specialist knowledge and expertise available through alliances.  An alliance can allow your company to concentrate on its core attributes whilst ancillary functions are outsourced to external specialists.  So, for example, fast food chains link with firms operating home delivery apps such as Just Eat and Deliveroo.
  3. Risk:  Alliances can work to reduce risk.  Financial commitments can be shared.  Going it alone could mean isolation from industry and technical standards.  For example, small food producers wanting to supply UK supermarket chains are expected to meet British Retail Consortium standards which often go beyond EU and UK legislation.
  4. Learning and Innovation:  Alliances and joint-ventures allow businesses to learn. that learning can help firms develop sustainable competitive advantage.

For joint-ventures to be successful, you need more than a strategic fit.  You need a cultural fit as well.  You must be able to work with your chosen partner.  If your business is risk averse, a partnership with a buccaneering high risk operator will be unlikely to succeed.  A fine example is the failed joined venture between BP and the Russian oil firm TNK.  That partnership became distinctly frosty and hostile and in the end BP could no longer work with TNK.


Why Businesses Co-brand

Co-branding is cooperation between two or more businesses, each of which has significant customer recognition and where both brand names are used on products and services.

We can all see co-branded products around us every day.  The lap-top on which I am writing this article is a Hewlett Packard machine but it is clearly marked with the logo of Bang and Olufsen, the hi-fi specialists, It contains microchips produced by Intel and it came with Microsoft 10 operating software.  Computers are excellent examples of the co-branding process in operation.

It is important that co-branded products offer added value to consumers.  The must offer something new, better and with additional capabilities than each of the constituent brands.

So Elixir guitar strings are co-branded with Goretex, the coating offering strings with a longer lifespan and greater resistance to corrosion.  Coca-Cola is co-branded with Bacardi rum to allow the production of ready mixed spirit drinks. Barr’s Iron Bru is similarly co-branded with Famous grouse whisky. Claridges co-brands with Gordon Ramsey in relation to fine dining restaurants.

In effect co-branding is a superior form of joint venture.

The following are types of co-branding categories by the level of shared value they create:

  1. Reach Awareness Co-branding: This offers the lowest level of shared value. It is where cooperation between brands allows the parties involved to increase brand awareness through exposing their brand identities to the existing customers of their co-branding partner. An example would be the direct marketing of credit cards alongside customers bank statements.  Especially if the credit card is promoted to high net worth individuals.
  2. Values’ Endorsement Co-branding:  The co-branding allows for endorsement messages which promote individual brand values and desired market position. So Tesco sponsor the Cancer Research Race for Life and Bank of America issue credit cards on behalf of the World Wildlife Fund (where a contribution to the fund is made each time the card is used). Tesco and Bank of America hope to co-opt the values of their co-brand charity.
  3. Ingredient Co-branding:  Branded components are included in products.  Like the speakers in this laptop. This allows the cross-promotion of different brand attributes.  So this computer offers better sound reproduction because of the quality engineering offered by a high quality, specialist audio manufacturer. This type of relationship needs a junior and senior brands e.g. Hewlett Packard being the senior brand and Bang and Olufsen the junior brand.  Such a relationship means that the number of potential co-branding partners can be small. The use of Lycra and Woolmark are similar junior co-brands. The aim is to reinforce your brand values by co-opting junior co-brands which highlight those values.
  4. Complimentary Co-branding:  Where brands combine to create a product greater than the sum of their individual parts.  These can be separately branded joint-venture products.  For example, Smart Cars are a co-branded joint-venture between Swatch, the designer watch manufacturer, and Mercedes.  Mercedes bring their engineering excellence and Swatch bring their design flair.  Similarly Lego co-brands with Star Wars and Marvel Comics. Lego’s co-branding brings the excitement and story-telling of their brand partners and Lego bring their market leadership in toys and model-building. However, with such complimentary co-branding it is important not to give away your brand.  On one occasion Lego refused a co-branding opportunity; to create a building block product for a high street chain; because the co-branded product reduced the individuality of the Lego block.

Co-branding can offer numerous benefits:

  •  new income streams through expanding your brand identity into new market segments
  • boosting the earning potential of existing products
  • creating credibility in sceptical markets.
  • additional brand exposure with lower risks
  • short-term tactical advantages over competitors
  • shared advertising costs through cross promotion (Sky broadband currently advertises it’s products alongside the promotion of family animation films like The Secret Life of Pets and The Incredibles).
  • Royalty income through the use of components in products produced by others e.g. for many years Nick Faldo, the major-winning golfer earned significant income by lending his name to clothing produced by Pringle.
  • boosting sales through the inclusion of additional product benefits
  • The use of joint tools by co-branding partners to allow entry into new markets and lowering the cost of such new market entry.

However there are significant risks to co-branding strategies, particularly in markets like fashion.  You have to carefully consider who your co-branding partners will be.  Your partner may be seeking a quick buck rather than a long term relationship. Financial greed has ruined many a co-branding relationship.

Co-branding partners must be compatible. If they operate in different markets, it may be important to seek a partner with a similar target customer profile.

Brand strategies need to be coordinated and co-branding deals can be ruined if a partner suddenly shifts their strategy to one that isn’t complimentary with your brand.

You need to avoid brand dilution; where the co-branding weakens your brand image and identity.

You also need to avoid error contagion, where an issue with an individual brand does not lead to errors with the co-branded product.  For example Ford had massive issues when manufacturing and design faults with Firestone tyres were discovered. These tyres had been fitted to thousands of Ford cars during manufacture.

The Pros and Cons of Co-branding

I am writing this blog on a Hewlett-Packard laptop.  It is labelled as containing Intel processing chips and, in the top right-hand corner is the logo of Bang and Olufsen, the high quality audio manufacturer.  My laptop is a perfect example of co-branding.

Co branding is the term used for a collaborative joint venture between two independent organisations as part of a coordinated marketing strategy.  It is a common strategy in the IT and automobile sectors but increasingly it is seen in a wide range of consumer product sectors.

The Mini Cooper is an example of co-branding.  The Mini brand is owned by BMW but the cooper brand means engine tuning has been carried out by Cooper Engineering.  Freeview are currently advertising their television service in commercials which also mention retailers such as Curry’s PC World; as well as television manufacturers.  McDonald’s advertise their McFlurry desserts in a range of flavours including Galaxy Ripple (the Galaxy chocolate brand is owned by Mars); Cadbury Crunchie and Oreo McFlurry (Oreo biscuits are manufactured by Mondelez International).  Co-branding can range from the joint development of a new product to a licensing agreement to use a particular branded ingredient in a product.

Often co-branding is an attempt to create something new which is outside the scope of the individual organisations involved or which can only be achieved by firms joining forces in terms of expertise or capability.

Two obvious benefits of co-branding are the ability to reduce operational risk and to share costs between organisations.  For established brands, co=branding can be an opportunity to develop new income streams and to boost the earning power of existing brands.  For new brands, it can offer instant credibility in a sceptical marketplace and allow easier access to new markets.  For both there is the opportunity for additional brand exposure and risk reduction.

There can be an opportunity for royalty income.  NutraSweet, the artificial sweetener brand licence the use of their product in a range of foodstuffs manufactured by other food producers.  The use of the NutraSweet name gives an enhanced product offer which increases sales.  NutraSweet receives a share of the profits generated.  Nick Faldo, the golfer, had such a deal with Pringle, the knitwear manufacturer. For each jumper sold in his proprietary range, Faldo received a royalty payment.

As stated in the NutraSweet example, co-branding can offer a sales boost.  By using the Bang and Olufsen brand to promote the audio capabilities of their computers, HP add a cache to their brand and increase consumer desire.  In turn the expectation is an increase in sales.

Co-branding allows firms to enter into new markets.  The East Coast mainline rail service in the UK is a co-branded joint venture between Virgin and Stagecoach.  When Tesco entered the UK consumer banking market, it initially did so as part of a joint venture with Royal Bank of Scotland.  If you are entering a new geographic market, having a partner firm who already has experience and exposure in that market will make the process easier.

Opportunities for cross-promotion can be developed through co-branding.  The Olay moisturiser brand currently runs commercials using the beauty editor of Vogue magazine.  For many years, washing machine manufacturers would run commercials specifying that certain brands of washing powder such as Ariel worked most efficiently in their machines.

Co-branding can give additional benefits to consumers.  For many years both Sainsbury’s and Barclaycard have offered the Nectar point scheme.  This loyalty programme, in turn, allows consumers to purchase goods and services from a wide range of corporations, from wine to holidays.

Co-branding allows the integration of customer services.  Moto service stations in the UK have agreements with a number of retailers, including Marks & Spencer, WH Smith and Burger King.  Moto operate franchises on behalf of these retailers.  The retailers also gain access to the UK’s motorway network. In return, Moto can gain from the reputation of these retailers.

Co-branding can go wrong.  The key is to pick the right partner.  When the wrong partner is chosen it can be a disastrous strategy.  It can put your reputation at risk.

Financial greed can ruin a co-branding strategy.  It is a strategy for long-term gain, not a ‘fast buck’.  Profits from co-branding must be fairly distributed.  The strategy of the two co-branding partners must be complimentary and they must have similar goals.  A co-branding exercise will fail if its partners want different things from it.

Co-branding can lead to brand dilution.  An example is the Alfa Romeo Arna.  The Arna was a joint venture between Alfa and Nissan to produce a sporty saloon car.  Alfa were known for their sleek designs; Nissan for their engineering quality and quality assurance.  It seemed to be an ideal marriage.  The Arna was a disaster.  It was a box on wheels with no sleek bodywork.  It was replete with mechanical and electrical faults.  The Japanese appeared to have been responsible for the cars styling and the Italians for its engineering.  Rather than taking the best attributes of the co-branding partners, the Arna took their weaknesses.

With careful management and the correct strategic choices however, the benefits of a co-branding strategy far outweigh the weaknesses.