MPowerment Matters

Entrepreneurs and Strategic Alliances

October 2007

As John Donne wrote in the 17th century, “No man is an island, entire of itself.” This meditation has been commonly cited to educate us to the fact that people are interconnected, not alone in this world. The same can and should be said about entrepreneurs.

Entrepreneurs can feel alone. They can have a sense that nobody understands their ideas, nobody shares their vision; they have to go it alone. In many cases, it becomes a “me against the world” sort of attitude.

In other instances, those starting and building businesses focus on developing internal capabilities and marshaling resources to achieve their goal, without creatively considering external options. They can feel as if their growth or expansion is limited by their cash flow, the personnel they can afford to carry on payroll, their limited marketing resources, or the number of hours in a day.

Entrepreneurs need to consider who out there in the big wide world can serve as a strategic ally. A strategic alliance can be defined as an agreement between two entities under which each commits complementary resources, competencies and capabilities to a joint effort to achieve mutually agreed upon objectives. It is a cooperative strategy structured for a limited purpose. Why do it? It makes good business sense to team up with others to gain competitive advantage through access to others’ resources, including capital, technology, people, distribution channels, marketing, etc. Additionally, the right alliances can lead to beneficial geographic expansion, product line expansion, cost reduction through economies of scale and manufacturing efficiencies. They can even inhibit competitors.

A simple example would be a buying group, comprised of a number of relatively small companies with limited buying power, joining together to pool their purchasing power and thus achieve better pricing. In this particular instance, the strategic alliance is between competitors. But such alliances may form vertically as well as horizontally, with customers, suppliers, and others up and down the supply chain.

We should not ignore the first word of the phrase, “strategic”. Before entering into any alliances, a company should make reference to its strategic plan. Leaders need to be reminded of their vision and values and strategic direction so they can be clear on how an alliance fits their objectives. Once clear on objectives, the next step is to determine which of the potential strategic partners best meets the firm’s values and desired behaviors. More working relationships between companies fail because of culture and value clash than any other reason.

The next step is to review potential opportunities that both can agree upon and then determine what each partner brings to the table to pursue those opportunities. The mission for the alliance must be agreed upon up front and it must benefit both organizations. The point of this is that the mission could not be achieved by either company individually. The companies can only succeed in their mission by working together. There has to be mutual trust and respect. But beyond that there must be a system of accountability. Steps must be implemented to monitor the contributions of each and the follow through of each for their respective action steps.

As Robert L. Wallace states in his book, Strategic Partnerships, there are three possible incentives for entering into a strategic alliance. They are:

(1) Achieving growth by selling new products and services to existing customers. Under this scenario, you ally with a partner to provide their products or services to your customers, or the two of you jointly develop new products for your customers.

Let’s look at an example. Joe, a car mechanic has a very successful garage but would like to increase revenues. A nearby entrepreneur, Doug, has started a detailing and dent removal business and has been wildly successful, but has limited capacity to park cars awaiting service and not enough staff to handle the work as fast as he would like. He has also seen that there is an opportunity for him to expand into service, but he doesn’t have the resources. After doing their due diligence, the two talk and decide that an alliance would be mutually beneficial. Joe begins offering Doug’s services to his customers and they love it. Joe makes a percentage off of each one. Doug moves his operation to Joe’s extra space, saving money on his rent but still providing rental income to Joe. He refers mechanical work to Joe and makes a percentage, and they share the cost of some labor. It is a win-win. Each of them gets to offer additional services to their existing customers.

(2) Achieving growth by selling existing products and services to new customers. If you ally with a partner already in a market, you can shorten your entry time and lower your entry barriers into that market.

An example here could be a local or regional retailer of blown glass, Barb, who doesn’t have the money to open new outlets in bricks and mortar stores. She determines that the internet provides her with potential national sales without incurring increased overhead. She finds Marianne, an internet seller of the works of American craftsmen, who is successfully selling complementary products on her site. She has been looking for new products to sell. Her customer base provides an entire new market for Barb.

(3) Achieving new growth by selling new products and services to new customers. In this instance, the two companies can combine their capabilities to create something new that will attract new customers for both. Product development time and sales cycles can be shortened, leading to market expansion.

Take Mike, a fabric designer, who has been working on lightweight, stretch, waterproof fabric for outdoor clothing and ski wear. He happens to meet Rachel, whose company manufactures and distributes p.v.c. tubing for industrial purposes. After finding out a bit about each other’s business, they begin to brainstorm and realize that between them, they could create flexible camping tents and emergency shelters. In the aftermath of Hurricane Katrina, they realize there may be a large market for such shelters. While it is a totally new market for both, it makes great sense. With only little additional expense, they can set up an assembly line and crank these structures out quickly. They reach out to FEMA, the Red Cross and other emergency management organizations and find a ready market. Together, they have created a new business and are reaching out to totally new customers.

Strategic partnerships can exist for a single purpose, for instance, to pitch one particular piece of business. In such cases, the agreement between the parties can be quite simple. A simple letter agreement can suffice. If the partnership takes the form of a long-term joint venture, much greater documentation is required. Consideration has to be given to the creation of a new, jointly owned legal entity, and a partnership or shareholder agreement is imperative.

Alliances make sense for entrepreneurs, especially those with limited resources. Finding ways to utilize the strengths of others to complement your strengths is sometimes a necessity for survival. It is a form of creativity that is sometimes overlooked by otherwise innovative business people. While this article is not about networking, the opportunity to meet potential allies is a strong argument for entrepreneurs to be “out there”, meeting new people and listening to them when they talk about their businesses.

Since it is popular to provide lists these days, in closing, here are ten good reasons for entrepreneurs to create strategic alliances:

1. You can increase your sales to your existing customers by expanding your product offerings.
2. You add your partner’s sales force to yours, effectively increasing your sales force without adding cost.
3. You can sell your existing products to new customers merely by adding your partner’s client base.
4. You increase your marketing and advertising budgets by splitting costs with your partner.
5. You add innovation to your business by taking advantage of your partner’s knowledge and experience. This can certainly lead to rapid growth as you jointly come up with new business ideas. This creates the opportunity to sell new products to new customers.
6. Your employees can become better trained and can develop new competencies by being exposed to the technologies and practices of your partner. If done well, this can lead to an exploration of the best practices of both companies, which can make both better individually, and will enable the partnership to function efficiently.
7. You can cut your costs through careful allocation of responsibility and taking advantage of your partner’s existing capabilities that you do not have.
8. You have the opportunity to capture market share by pooling customer lists and marketing budgets. This can also work to create entry barriers to others looking to get into the market.
9. Being larger now, you may be able to negotiate better pricing from vendors.
10. It takes the pressure off the entrepreneur. You are not an island anymore. You have a partner without all of the downside of having a partner.

Management Mpowerment Associates works closely with entrepreneurial organizations to help them achieve better results. For information about our services, check out our website at www.managementmpowerment.com and our blog at www.entrepreneursmentor.net.

The 2nd Managing Partner Development Institute “What You Didn’t Learn in Law School”™ conference will be held in Pittsburgh, PA on January 11-12, 2008. For more information, go to www.managingpartnerinstitute.org.