What are the benefits?
A strategic alliance allows you to grow your organization without necessarily expanding its size and increasing costs. It also allows you to test the market for growth potential. Some other possible uses of a strategic alliance include the following:
- Enter new markets
- Increase the scale of your production
- Get better prices through bulk purchasing
- Access new technology
- Accelerating research and development by sharing costs and resources.
When you're shopping for a potential partner, you should carefully assess the risks. Ask yourself the following questions.
- What are the attributes you're looking for in your partner?
- Do you have the same objectives as your partner?
- Have you clearly articulated your expectations to each other?
- Will you be competing in the same market? Will your alliance affect your market position?
- Are your brands compatible? For example, a price focused company and a high-end business might not be a good pairing.
- How long will the relationship last? Is it a one-time deal or a long-term engagement?
- 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?
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 plywood manufacturer joins forces with competitors to select a common transportation company. After guaranteeing the transportation company a minimum volume, these businesses convince the transporter to give them a flat rate and to invest in equipment to protect their products during shipping.
Or, a manufacturer of stone products decides to outsource transportation to a group of employees interested in taking over this part of the operations. 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
Forming a distribution 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. Both companies take advantage of this arrangement to simultaneously expand their market. The lumber company now promotes concrete products in lumberyards, and the concrete product manufacturer promotes wood products in renovation businesses where it already has 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 to local standards and provides some after-sales service.
A joint venture for production
Another alliance strategy is to set up a joint venture where a partner is responsible for production and the distribution of products in a specific area. In general, a partner would transfer knowledge and know-how, and the other would collect royalties in return.
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.
Or, a company that specializes in manufacturing metal 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 transfers its technology and knowledge. The manufacturer is able to leverage the local company’s familiarity with the economic, business and cultural aspects of its region, giving it a much-improved chance of breaking into the market.
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.
You should also take the time to do research, check the credit of potential partners and consult other companies that may have dealt with your prospective partner.
Remember that although the price is important, so are reliability and speed.
There are many other types of alliances you can consider depending on your business needs. What is most important is to select a strategy that will help you bring your business to a whole new level of growth.