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Many allies are small, says Mitchell Lee Marks, co-author of Joining Forces, a book on business partnerships. This statement is supported by a recent survey of CEOs of small, fast-growing companies in which 90 percent reported forming alliances.
Small businesses in search of growth favor alliances because they can quickly and inexpensively provide access to technology, expertise, marketing, production, distribution and other capabilities. Studies show businesses that participate in alliances grow faster, increase productivity faster and report higher revenues than abstainers.
Alliances are excellent for testing the waters before a full-scale merger. Because no ownership changes, it's easy to back out, notes Marks. Another advantage to alliances compared to mergers or acquisitions is that you can participate in several at the same time.
Synergy is the benefit most alliances are after. If you have a product but lack distribution, you may seek synergy by allying with a company that has good distribution and no competing product. Companies that own technologies that can be combined with yours to create a compelling product are also potential allies. In international alliances, one company can provide local market skills while another supplies imported products or technologies. Allies may also benefit by purchasing cooperatively, marketing jointly, combining research and development, co-sponsoring training, or agreeing to set standards in a new technology.
Yet it requires skills to maintain healthy alliances. Three out of four corporate alliances disappoint, producing higher costs or lower returns than expected, according to Marks.
Seeking Allies Successfully
Allying well is almost as difficult as marrying well. Here are keys to finding and making a match that will last:
- Plan first, pick later. You should know exactly what traits your ally needs before you start looking for one.
- Network. The most likely place to find an ally is among customers, suppliers, competitors and other professional associates.
- Look for synergy. A combination of allies should add up to more than either does separately.
- Value trust more than competence. An expert ally you can't trust is no ally at all.
- Listen to your gut. Check a potential ally's credit rating, financial reports and reputation in the industry, but trust your feelings when it comes to the final decision.
- Identify benefits, including synergistic effects. Make sure the benefit isn't lopsided so that no one will feel he or she is being taken advantage of.
- Set precise goals for what you want to accomplish. Without goals, an alliance can flounder.
- Carefully and frankly communicate expectations, along with the ways performance will be measured, to allies and your own employees. Describe what and when each party will invest, as well as expected returns and how any disputes will be resolved. Put it in a legal document.
- Don't forget to devise an exit strategy. It's a serious mistake not to have a comprehensive plan for ending the alliance.
Before You Finalize the Deal
Questions to consider before finalizing an alliance, from Emer Dooley, who lectures on strategic management at the University of Washington:
- What are everyone's objectives? There are three sets of objectives: yours, your partners' and the alliance's. Figure out all three in advance and determine whether they're compatible.
- Is it a great deal for both sides? Don't just negotiate to get the best for yourself. If the other side thinks the deal is unfair, they won't put much effort behind its success. Who's holding the reins? Know how dependent you will be on your partner. Negotiate a credible commitment so you're not subject to "hold up," where they've got you over a barrel.
- What happens if you break up? Establish a set of exit conditions around default and failure to meet objectives. Make sure you understand and have control over how (and in what jurisdiction, if it comes to that) these disputes will be resolved.
Now That It's Underway...
Once you've started an alliance, keep it going. Refer frequently to your original objectives. See how you measure up and communicate the results and any changes to everyone involved.
Many alliances are based on hoped-for savings, but alliances involve inevitable costs. Management time is the biggest one. Underestimating the amount of time it will take to manage an alliance is a common cause of failure.
Excerpted from Growing Your Business and "Gold Bond" by Julie Bick.