Do you want to take your business to the next level? Is limited capital or other resources holding your company back? A strategic alliance may be the solution.
A strategic alliance is an arrangement between two or more businesses where they agree to work together to achieve certain objectives. Normally each business continues to be separate and independent while they share the benefits of the alliance.
Three Different Examples of Strategic Alliances:
In a joint venture, two or more parties agree to form a separate “child” entity to undertake a specific project or venture. When both parties have equal stakes in the child entity, the new entity is called a 50/50 joint venture.
In July 2017, the AES Corporation, an American energy firm, and Siemens AG, a German engineering conglomerate, announced they were forming a joint venture to serve the energy storage market. They set up a new company, Fluence, for this joint venture.
Fluence is a 50/50 joint venture and is going to sell lithium-ion battery technologies that both companies had previously sold independently. Fluence received the various government approvals necessary and became operational on January, 1, 2018.
Equity Strategic Alliance
In an equity strategic alliance one company purchases an equity stake in the other company.
A great example is Panasonic. In 2009, Panasonic entered into an agreement to supply Tesla Motors with lithium-ion battery cells to use in its cars. In 2010 Panasonic invested $30 million in Tesla to support the growth of the electric car industry. Over the years, this alliance has grown. In 2017, Panasonic announced it and Tesla would start making batteries at a factory outside of Reno, Nevada.
Non-Equity Strategic Alliance
Here, two or more businesses agree to share resources and capabilities to gain a competitive advantage without forming a joint venture and without an equity exchange.
One example is the partnership between Starbucks and Kroger: Starbucks has kiosks in many Kroger supermarkets. Starbucks pays Kroger for space, and Kroger customers have the opportunity to sit down and relax with a coffee while shopping. Both parties benefit nicely.
The Basics of Forming a Strategic Alliance
Before you do anything, realize that the business you want to create this alliance with may not be thinking about an alliance with you. You may have to convince them how much they could benefit from an alliance with you.
The steps for creating a business alliance look something like this:
1. Identify Your Primary Customers
The entire universe is not your primary customer, and you need to know exactly who your best customers are, in terms of location, age, income, wealth, buying habits and other characteristics.
2. Identify 10 to 15 Businesses That Have That Same Customer
At an absolute minimum, there has to be significant overlap. But don’t look at competitors; instead, focus on businesses that offer products or services that complement yours.
3. Determine How a Strategic Alliance Will Benefit Them
What will they gain from it? How will it impact their bottom line?
4. Present a Proposal
Show them how this alliance will benefit them.
5. Negotiate Terms
Your initial proposal might not be the best fit for the other party. Be prepared to spend some time going back and forth on terms until you both agree. If you can’t agree, then walk away and try again with someone else.
6. Formalize an Agreement
In this agreement, you should specify the responsibilities of all parties and the benefits for each. And be sure both parties sign the agreement.
A Strategic Alliance Gone Wrong
Dell is one of the most successful computer companies in the world. But not many people know that years ago, Dell had a strategic alliance with Asus computers.
Asus was founded in 1989. Initially, it supplied circuits to Dell.
In 1990, Asus approached Dell and proposed to supply them with the motherboards for their computers. Asus had expertise here and could supply the motherboards for 20% less than it cost Dell. Dell agreed.
Later, Asus approached Dell again. They proposed assembling Dell’s computers. Again, they said they could do this for 20% less than Dell. Again, Dell agreed
Eventually, Dell outsourced everything to Asus, and Dell ceased manufacturing computers; all Dell did was put its name on the computers Asus made.
Then, in 2005 Asus began marketing and selling computers under their own name. Asus was competing for sales and market share with Dell. Obviously, this was not good for Dell, so they terminated the alliance with Asus. Since Dell was no longer manufacturing computers, they had to scramble to outsource that work to other manufacturers.
Since 2005, Asus has grown significantly. In 2016, Dell was the third largest computer manufacturer with 14.7% of the market. Asus was fourth with 7.6%.
The full story of Dell and Asus can be found in the book, “How Will You Measure Your Life,” by Clayton Christensen.
A Successful Joint Venture
You have probably heard of Icy Hot and may have seen some of its commercials where Shaquille O’Neal promotes it.
Back in the 1970’s, the owner of the business producing Icy Hot knew he had a great product. He just didn’t know how to market it. He contracted with a marketing expert, Jay Abraham, to do the marketing. Jay set up joint ventures with radio and television stations, magazines, newspapers and mail-order houses.
When Jay started working with him, the owner was selling about $20,000 of Icy Hot. In the first year, sales jumped to $13 million. The owner eventually sold Icy Hot to a large pharmaceutical company for about $40 million.
Jay tells this story in his book, “Joint Ventures: From Mediocrity to Millions.”
Strategic Alliances Aren’t for Everybody
Before entering into a strategic alliance, have your accountant and attorney review all the legal documents.
Make sure that:
- Any business you want to form a strategic alliance with has a vision that is compatible with yours.
- Both businesses see real benefit from the alliance – if one party feels used or slighted, it won’t work.
- The people managing the alliance do it well – if they don’t, the chances of failure increase dramatically.
- The people in both businesses trust each other – if they don’t, the alliance will never succeed.
- Each business monitors the results. At some point, strategic alliances outlive their usefulness. At that point, both parties should go their separate ways.
What can you expect from a properly functioning strategic alliance?
- Your and your partners’ businesses will grow more quickly than they otherwise would have.
- Sales and profits will increase.
- Both businesses will gain a competitive advantage in their respective markets.
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