By: Terri Denison, Georgia District Director
U.S. Small Business Administration
A couple years ago, small business expert Jim Blasingame wrote that there are three management disciplines that would have greater importance to small businesses in the 21st century—leveraging technology, business networking and building strategic alliances. I have to concur with his observation. While small businesses have made strides towards embracing technology and stepped up their networking, there is still some reluctance for them to employ strategic alliances.
Strategic alliance is a broad term which encompasses an array of collaboration options between two or more businesses to achieve common strategic goals. Collaborations can range from bartering goods and services, cross-marketing, and buying cooperatives to joint venture agreements to perform on specific contracts or projects. An important point is that the parties can engage in these collaborations in various ways while continuing as separate business entities.
Why do smaller businesses shy away from strategic alliances? The traditional view of free enterprise is one of win-lose competition. The natural tendency of the entrepreneurial spirit is rugged individualism. Small business owners fear loss of control, being taken advantage of by strategic partners, or ending up in prolonged legal and financial entanglements. Owners may sense they are “giving up” revenues and profits because they are being shared with strategic partners.
However, today’s economic realities make alliances a more necessary consideration than ever before as a means of survival and growth for small businesses. In a more globalized economy, businesses of all sizes are facing greater competitive pressures, which challenge firms to adopt new business models and approaches. Business resources in the post-recession environment are at a premium. This environment is far less tolerant of business operations and management through “trial and error”. In response to their own economic realities, government and corporate entities are continuing a trend of consolidating and streamlining their procurement processes. The result is larger, consolidated contracts and projects that are growing beyond the capacity of smaller, individual firms.
Strategic alliances enable small firms to maintain or increase their competitive advantage in a variety of ways. Companies can pool their limited resources, such as capital, personnel and information technology infrastructure and means of production. They can obtain more competitive purchase and supply pricing. Expanded market segments and geography can be achieved. Firms are able collectively to access different skills and knowledge needed to take them to the next level individually. A younger or smaller company can benefit from the established and respected brand recognition of a more established or larger business collaborator in exchange for providing that business with a fresh operational approach or entry into a new market. Risks can be shared in exchanged for greater shared returns on investment. The sum of these and other benefits that can be derived from successful strategic alliances is a win-win scenario for the participating companies.
Business owners should remember the following when considering and entering strategic alliances:
- Know and be able to clearly articulate the competitive advantages, goals and objectives for their own business. Doing so will help them to know and communicate the advantages and benefits they can bring to the other company or companies in the prospective alliance.
- Perform the sufficient due diligence in evaluating prospective strategic partners. Evaluation needs to include company philosophy and culture as well as overall capabilities and reputation in the marketplace to help determine the complementary fit in an alliance.
- Alliances do not have to be a small business with a large business, a minority-owned business with non-minority owned one, or a women-owned business with a male-owned company. One of more similarly sized companies or companies with the same owner socioeconomic characteristics can be valuable.
- Incorporate in alliance written agreements and operating practices joint goals and objectives, clearly defined roles and responsibilities for each alliance participant, a communication plan, and periodic re-evaluation of the arrangement.
- Alliance parties must work towards developing “our way” for the specific alliance projects while maintaining the general operations and practices of the individual participating businesses.
- In forming joint ventures, consult with and utilize attorneys and accountants who have experience with joint venture agreements.
- Have a clear exit strategy for terminating the alliance when it does not work out, has met its objective, or has simply run its course.
When a new business technology, model or practice emerges, a business owner may jump on the bandwagon because it is the latest “in” thing. However, long-term vision, goals and objectives must ultimately be the driving force for the company. In today’s fast-paced, dynamic economic environment small business owners must understand the powerful potential of strategic alliances in the helping them fulfill their vision and goals and have the confidence to utilize this tool when careful, objective analysis indicate that their companies would benefit.