From the April 1998 issue of Entrepreneur

No man is an island. No business is an island, either. No matter how large or small, every company is just one tiny piece of the complex puzzle that makes up the business environment of the '90s. In reality, few companies are shaping their industries by generating all the innovations alone. Rather than ignoring what others are doing in the marketplace, many believe that success in today's competitive business world demands a keen sense of other companies' actions and how those activities shape, enhance and even benefit their own businesses.

Consequently, more and more companies are finding it advantageous--even necessary--to form strategic alliances. Businesses are forging partnerships in record numbers to develop products, share resources and pool expertise. The typically temporary nature of alliances makes them even more palatable to entrepreneurs. Partnerships foster mutual benefits, but unlike a merger, ownership remains with the respective parties--and the alliance exists only as long as it's advantageous to both.

Among the most notable recent pairings is the alliance Microsoft formed with longtime rival Apple Computer, sending shock waves through the computer industry. While alliances are commonplace in the hardware and software fields, they've also become prevalent in other industries--from communications to retail to manufacturing.

According to a recent Coopers & Lybrand LLP study, among America's fastest-growing companies, 48 percent more alliances exist today than three years ago. The number of alliances per company is also increasing. Of the firms surveyed, 61 percent are participating in an average of four strategic alliances, compared with 55 percent involved in an average of three alliances in 1993.

The fast pace of many industries, shrinking product cycles and changing technology are driving this trend. "The [motivation for] most alliances today is that markets [don't have] the patience to wait for internal growth," contends Robert Paglia, a partner at Coopers & Lybrand.

Alliances are particularly alluring to small businesses because they provide the tools businesses need to be competitive. "For some small companies, alliances are a matter of survival," says Robert E. Spekman, professor of business administration at the Darden School of Business at the University of Virginia in Charlottesville. "It's becoming too complicated and expensive to develop expertise, and market access is becoming much too hard to come by."

Mutual Benefits

More often than not, today's alliances are created to increase market penetration for a company's product or service. In fact, according to the Coopers and Lybrand survey, 54 percent of firms that formed alliances did so for joint marketing and promotional purposes.

For small companies, pairing up with a large company that has mass appeal and vast marketing resources opens up a world of possibilities. Clotee McAfee and Ruby Eddie, co-owners of Uniformity LLC, a Los Angeles manufacturer of fashionable high school uniforms, knew they had an innovative product--but they weren't too naive to realize they lacked the marketing clout to make a real impact.

"We knew we didn't have a Calvin Klein budget, but we needed to market [our uniforms] that way to accomplish what we wanted," says McAfee, 43. "We had to get our name in front of a lot of kids for [our product] to be accepted."

In October 1996, McAfee wrote to Macy's West, telling the department store chain about the product, how she and her partner wanted to market it, and why an alliance would benefit both companies. Macy's responded with strong interest, not yet having entered the clothing market for public school uniforms. A year later, Uniformity's clothing line debuted in Macy's Baldwin Hills, California, store, with plans to expand to another 10 locations on the West Coast. What's more, Macy's put its marketing clout to use for Uniformity by issuing a press release for the grand opening of the new in-store boutique. The two companies plan to participate in several more joint marketing campaigns later this year.

Alliances also make sense for high-tech firms such as Liquid Audio, a Redwood City, California, company that develops software for distributing music over the Internet. Since it was founded in January 1996, Liquid Audio has created more than 20 alliances with small and large companies, primarily for the purposes of joint marketing and product development.

"Alliances are important to us because we must stay focused on our core opportunity," says Robert Flynn, 43, co-founder of Liquid Audio with Gerry Kearby, 50, and Phil Wiser, 31. "We have limited resources, so if something isn't essential, we don't want to spend our time and money developing it," says Flynn.

Instead, Liquid Audio has turned to its many partners to expand its horizons. Alliances with record labels such as Capitol Records, BMG Entertainment and EMI Records Canada have given the company the necessary music content for consumers to download. Meanwhile, alliances with technology partners such as Microsoft, which brings its audio streaming technology to the table, have added value to Liquid Audio's offering.

Strategic alliances prove especially prudent in industries dominated by big players. One example: the Integrated Suppliers Alliance of Wisconsin (ISAW), co-founded in April 1997 by Wayne Riekkoff. Riekkoff, owner of KM Tools Supply Ltd., a distributor in Menomenee Falls, Wisconsin, saw that the decision made by many manufacturers to reduce the number of vendors they work with was squeezing out small companies lacking the more diverse offerings of larger distributors. As an alternative, the ISAW, which has 10 member companies, now offers a complete range of products to manufacturers by pooling all the members' resources.

"ISAW allows small distributors to compete with large, national distributors," says Riekkoff. "When they put all their resources together, they have much more to offer."

Alliances are also beneficial when companies want to expand beyond their current geographic boundaries. Partnering with an international company to enter unfamiliar territory can be a smart move--and is often much easier than going through the arduous process of building the expertise yourself. According to the Coopers & Lybrand study, 50 percent of firms involved in alliances market their goods and services internationally vs. 30 percent of nonallied participants.

A Perfect Match

Entrepreneurs sometimes enter into alliances without thoroughly analyzing their options, only to realize a merger or acquisition--or even selling the business--would have been best. This is a primary reason many alliances fail, so make sure an alliance is the best option for your company.

For Liquid Audio, the key to finding the best partners has been to select companies with whom it has experienced a meeting of the minds. Such was the case with N2K, a company that operates Music Boulevard, a top retail music site on the Web. N2K and Liquid Assets shared a common vision--digitally downloading music over the Internet. "That made us realize we were a perfect match," Flynn recalls.

Entrepreneurs interested in forming an alliance should look for companies that are one step ahead of their competitors. "Macy's has always been ahead of the game," says McAfee. "They set the pace for the industry. That was a key reason we chose them."

Researching a prospective partner is also crucial, according to Spekman. Find out about the business's key strengths, market position and, if possible, financial status. Ask current and past partners how they were treated; if they weren't equitable partners in the past, chances are they won't be with you, either, Spekman says.

Also, be clear with yourself why you're entering into the alliance--and what you expect to gain from it. "You need to understand how it fits into your business plan," Spekman emphasizes. Though the reasons may seem obvious, companies often rush into agreements unclear about how an alliance will prove beneficial. This frequently leads to poor choices.

Finally, there's the task of finding a company with a complementary corporate culture. While locating one with a culture exactly like yours isn't the goal, it's critical to look objectively at management styles, work ethics and values, and to admit where potential clashes could occur, says Richard Hagberg, Ph.D., a corporate psychologist and president of Hagberg Consulting Group, an executive development and organizational assessment company in Foster City, California.

Key questions to ask: How are decisions made? How controlling is management of its employees? At what pace do employees work? How competitive or aggressive is the company?

Honestly answering these questions leads to a better match, Hagberg says. Some companies, for instance, are known for their tight reign on employees or the long hours they keep; if your work style isn't similar to theirs, you could be headed for problems. Similarly, companies such as Intel are legendary for their aggressive style, Hagberg says. If you're considering an alliance with such a company, you must feel comfortable with their tactics. In the end, it's a matter of considering all the information and deciding if you can all get along.

Built To Last

An alliance is rarely a match made in heaven. Misunderstandings, compromises and disagreements are natural. Developing methods for clear communication and conflict resolution will put you on the path to creating an enduring partnership.

Early on, establishing key objectives and goals that reflect what both parties expect to gain from the alliance is critical. Clearly outline your objectives. Be sure they are realistic based on the amount of resources both parties are willing to put forth, and make adjustments as necessary. When Liquid Audio first entered into an alliance with BMG Entertainment, the parties developed grand plans--one involving software bundling--that needed to be brought back down to earth. "We didn't want to create expectations that were too difficult to meet," says Flynn, "so we scaled things back to make sure what we were trying to accomplish was possible."

Disappointments and misunderstandings can be avoided by establishing an effective process for working with your partner. Assess each company's strengths, and define responsibilities along these lines--especially in the area of management. Many alliances fail because of poor management relationships, so clearly document what's expected.

Also consider all the accounting, tax and legal ramifications of the alliance. Form a game plan for how the alliance will operate from the beginning to the end of the relationship.

Strike a balance. Nothing sours an alliance faster than the notion that one party is giving everything while the other is getting a free ride. "I think both sides have to feel as if they're being treated fairly," says Flynn. "In some strategic relationships we've developed, there was the feeling we were getting everything we wanted, but we had to give up so much in return that we didn't necessarily feel good about the partnership."

This is particularly important when forming an alliance with a large firm. For example, when Liquid Audio began its relationship with Microsoft, it wanted to make sure its needs were considered. "Microsoft is a huge company that puts fear into some people's hearts, and when we negotiated the relationship with them, we wanted to make sure we didn't feel we were giving too much away," Flynn says. "So we kept renegotiating the deal until there was equal consideration. For everything we're giving them, they're giving back."

You need to keep the lines of communication open. McAfee, for instance, receives weekly sales reports from Macy's store managers and talks with senior management at Macy's headquarters each month to discuss important issues. The relationship must be developed to the point where both parties can be honest, regularly evaluate progress and offer recommendations for improvement. Moreover, when there are disagreements, resolve them as quickly as possible. Spekman says it's best to meet in neutral territory where both parties can speak openly and honestly. Then, focus on solutions rather than placing blame.

As is true of any good relationship, you can't measure an alliance's success by one incident or moment. The measure of any successful alliance is what you gain from the relationship over time.

Top Reasons Companies Form Alliances

Joint marketing: 54 percent
Joint selling or distribution: 42 percent
Joint production: 26 percent
Design collaboration: 23 percent
Technology licensing: 22 percent
Research and development: 19 percent
Outsourcing: 19 percent

Taming The Beast

Large companies often make excellent alliance partners. Yet, for a small company, working with a large corporation can be tricky. The inherently contrary cultures of large and small businesses frequently lead to conflicts and misunderstandings, says Richard Hagberg, Ph.D., a corporate psychologist and president of Hagberg Consulting Group in Foster City, California. Following are the top five things you must know about the inner workings of a large company before entering into an alliance:

1. Office politics. Large companies are typically more political than small companies, says Hagberg. If you're forming an alliance, recognize there may be hidden agendas that you're not aware of. Similarly, keep in mind that employees, particularly those in upper management, may not be free to share information and express ideas for political reasons.

2. They mean business. Unlike your small business, an employee in a large company is one of many. That means you'll be working in less of a "family" atmosphere than you're probably accustomed to. Employees will want to spend less time on pleasant formalities and relationship building and more time focusing on the task at hand.

3. Conformity is key. In most corporate cultures, conformity rather than uniqueness is highly valued. Do your best to fit in--and don't take it personally if your relationship with alliance partners is strictly business. "You may feel as if you're dealing with an impersonal beast," Hagberg says.

4. Bureaucratic layers. Because of a large company's bureaucratic nature, it can be difficult to get things moving quickly. When forming an alliance, find out how decisions get made, with whom the power lies and, ultimately, the best strategy for getting things done.

5. Loss of control. Big organizations have all kinds of procedures, systems and rules they probably want you to follow. You may feel like you've lost a bit of the freedom you had when running the show yourself--and you probably have.

Why Ally?

Because businesses that do outperform businesses that don't.

More growth: 49%
Higher expected revenues: 21%
Increased productivity: 38%

Contact Sources

Accountemps, (650) 234-6000, http://www.accountemps.com

Ferris Research, info@ferris.com

Information Technology Association of America, lbrownstein@itaa.org

Manpower Inc., e-mail: gretchen.kreske@na.manpower.com; http://www.manpower.com

Minuteman Press, (503) 661-4095, ardengus@aol.com

Olsten Corp., (516) 844-7560, fax: (516) 844-7577

Rochester Institute of Technology, (716) 475-2350, rjbbbu@rit.edu

Stafco, (800) 978-2326, don@stafco.com

Wichita Tool Co., fax: (316) 942-1758, wichtool@feist.com