June 13, 2010
Are you looking for a way to speed up entry into a new market, improve your productivity, gain a competitive edge or increase your range of products? A strategic alliance may be your answer. There are no set rules for such partnerships; they are what the businesses involved want them to be. For instance, a manufacturer might outsource distribution to a specialized firm, and benefit – and increase profits – by being able to focus on its core business. Or an Internet-based store could team up with an overseas courier company to accelerate delivery to clients in a specific market. There are any number of strategic alliance options available; what's important is to choose the one that fits your business profile.
What can an alliance do?
A strategic alliance allows you to grow your organization without necessarily expanding its size and incurring more costs. It also allows you to test the market for growth potential. Some possible benefits of a strategic alliance:
- Enter new markets with products and services.
- Extend your market reach.
- Increase the scale of your production output.
- Get better prices through bulk purchasing.
- Get access to new technology.
- Accelerate research and development by sharing costs and resources.
When you're shopping for a potential partner, you should carefully assess the risks. Ask yourself a series of questions:
- Do you have a specific list of attributes that you're looking for in your partner: location, market reach, business culture?
- Does your partner have management buy-in or commitment from its board?
- Have you ranked candidates with your specific attributes in mind? Clarify anything that could make data exchange difficult, e.g., rules for writing figures, measures or local currency.
- Do you have the same objectives as your partner? Have you clearly articulated your expectations to each other? Don't offer exclusivity to anybody unless a certain sales level is achieved or objectives are attained.
- Will you be competing in the same market? Will your alliance affect your market position?
- Are your brands compatible? For example, a cost-focused company and high-end consumer business might not be a good pairing.
- How long will the relationship last? Is it a one-time deal or a long-term engagement? Put everything in writing, and be sure you have a systematic way of communicating other than the telephone.
- Do you have a strategic plan in mind for your alliance? Do you have an exit strategy?
- Do you know what kind of contract you'll be signing? Ensure that it's governed by Canadian law. You will also need to clearly define your terms of payment, which vary in different countries.
Types of strategies
Join forces to achieve economies of scale
In general, an alliance can help a company achieve economies of scale. By joining forces, partners can obtain better purchase prices from suppliers and lower their cost per item. For example, a manufacturer of veneers and plywood joins forces with nine of its competitors to select a common transportation company. After guaranteeing the transportation company a minimum volume, these businesses convince the organization to give them a flat rate and to invest in equipment to protect their products during shipping. Or a manufacturer of stone products, having experienced strong growth through acquisitions, decides to outsource transportation to a group of employees interested in taking over this part of the operations on their own. To help them get started, the manufacturer convinces three other small businesses to use the group's delivery services. As a result, each business obtains better rates, and the new transportation company is guaranteed a minimum volume.
Use a larger company's distribution network
By striking agreements with distributors, you can invest more profits into your core business. However, it is crucial to profile potential distributors to ensure that they are aligned with your needs. Forming an alliance is much like recruiting a new employee. You want someone who matches your company profile and represents you well. For example, a manufacturer of concrete products convinces a large local lumber company to handle its deliveries as their markets overlap. Both companies take advantage of this arrangement to simultaneously expand their basic market. The lumber company now promotes concrete products in lumberyards, and the concrete product manufacturer promotes wood products in superstores and renovation businesses where it already had a presence. Or because of differences in regulations between Canada and the United States, a supplier of truck and auto-body parts has to adapt its products to over 2,000 different requirements. To tap into the American market, it enters into an alliance with a large U.S. company in the same sector. Orders are now centralized in a joint service centre, which checks compliance with local standards and provides some after-sales service.
Pass useful knowledge down the chain
You can also create strategic alliances with suppliers to develop new products and share knowledge and training to improve your production process. For instance, you can coordinate your production schedule with theirs, reduce costs through size and timing of orders and increase your range of products and services. Keep in mind that you will have to update your partner on any changes in new products and share forecasts to develop accurate sales plans.
Choose the best partner
You should choose your partner based on how the company ranks according to your key criteria. It's important not to be lured by sales pitches that don't meet your demands. You should take the time to do research, check the credit of potential suppliers and get firsthand advice from other companies that may have dealt with your prospective partner. Remember, that although the price is important, so are reliability and speed.
A joint venture for on-site production
Another alliance strategy is to set up a joint venture where an on-site partner is responsible for production and the distribution of products in a specific area. In general, your partner would transfer knowledge and know-how, and you would collect royalties in return. Your business gains from your partner's specific market expertise, and you get easier access to the market. For example, having developed an innovative product and the requisite machines for production, a manufacturer of timber frame components decides to issue exclusive manufacturing licenses in each U.S. state. This small business now sells, installs and maintains its equipment remotely via telecommunications. It also collects royalties on the products sold. The company prefers this formula to exporting as it foresees an uncertain future for the lumber industry. Or a company that specializes in manufacturing metal structural components has to ship its products by sea to distant markets. In order to penetrate the South American market, this company invests in a Venezuelan business where it transferred its technology and knowledge. Since local companies are familiar with the economic characteristics, business environment and cultural aspects of their region, they have a much-improved chance of breaking into the market and generating a better return on the invested capital.
That’s just a start. There are many other types of alliances you can consider, depending on your business needs. What is important is to select a strategy that will help you bring your business to a whole new level of growth.