Alliances

The term alliance refers to the combination of two or more organizations for the promotion of common interests or the joint exercise of functions. Alliances differ from mergers, acquisitions, and other combinations in that the united organizations remain legally independent corporations after the alliance. The motivation to form alliances stems from mutual needs and willingness to cooperate to reach common objectives that no single organization can accomplish alone. Several motivations prompt alliance formation: to gain competitive advantage, to leverage critical capabilities, to gain economies of scale or scope, to increase the flow of innovation, and to improve flexibility in responding to market and technology changes.

Alliances are not monolithic. Differentiations can be made regarding whether the alliance is considered strategic[Page 17] or not. A strategic alliance meets two conditions. First, the partners share the rewards and risks of the alliance and exercise mutual control over joint tasks. Second, partners make repeated contributions or exchanges in one or more strategic areas (such as manufacturing, distribution, or marketing) in the involved organizations’ core businesses.

Strategic alliances can be further divided into three groups, each formed on the basis of its own value-creating logic. In co-optation alliances, organizations entice potential rivals or producers of complementary goods or services (for example, suppliers or distributors) to combine forces by joining the alliance. Co-optation alliances create value by neutralizing competitive threats, building critical mass, and capturing “nodal positions” in the market. The value created can be substantial if strong first-mover advantages exist (such as allying with the only multispecialty physician practice in a market). In cospecialization alliances, organizations meld their distinctive assets, competencies, positions, and relationships to create new forms of value. A distinct motivation of cospecialization alliances is to develop and exploit new market opportunities (such as fully capitated Medicaid managed care). Finally, in learning alliances participating organizations seek to internalize the embedded capabilities of other organizations. The exchange of distinct know-how among participants may lead to the creation of new competencies and novel opportunities across multiple product markets (such as alliances between health care systems and physician practice organizations).

Some alliances are considered nonstrategic. An example is service alliances, also known as pooled or lateral alliances. They involve similar types of organizations (such as hospitals) with similar needs that unite to achieve scale economies, enhance access to scarce resources, and increase political clout. The domain of such alliances can encompass a wide array of technical, financial, human resource, and management services. Although service alliances can evolve into strategic alliances, they typically do not touch the core of member organizations’ business. As such, they do not figure centrally in the organization's efforts to position itself in the market.

Alliances can also assume various legal and organizational forms. They can be structured on the basis of equity or contracts. Equity-based alliances sometimes involve the creation of a new entity as when, for example, a hospital and a physician group form a closed physician–hospital organization for managed care contracting, utilization management, and quality improvement. There are also equity-based alliances without creating a new entity. For example, a hospital may form an alliance with a physician group by purchasing minority ownership shares, to encourage joint marketing, service production, and managed care contracting. Contract-based alliances are mainly for the purpose of service provision. They tend to entail longer-term mutual dependence than do traditional arms-length contracts.

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