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Alliances With Other Businesses Can Help Your Firm Reach New Markets

September 16, 1998

Forming alliances is a natural activity for any business owner. You need your clients, employees, mentors or members of your board of directors on your side, wanting you to succeed.

In terms of growth, an alliance is a relationship with another business entity that gives you access to resources that you otherwise would have to develop on your own. It also means you provide resources that the other company lacks.

"There has to be a mutual benefit; both parties have to end up gaining something," said Debra Esparza of Esparza & Associates, a Long Beach small-business consulting firm.

These agreements are called strategic alliances, strategic partnerships or joint ventures. Generally, a strategic alliance is a short-term relationship formed to complete a specific project. A strategic partnership is usually a longer, ongoing relationship, but each company remains independent. In joint ventures, the companies work more closely together and may form a third entity.

In a strategic alliance, a high-tech engineer and a manufacturer might team up to bid for a government contract. An example of a strategic partnership, for a longer-term mutual benefit, might be an agreement between a local restaurant and a large food manufacturing and distribution company such as Lawry's. The restaurant could buy spices and ingredients exclusively from Lawry's and, in exchange, Lawry's could help the restaurant upgrade its operations by sharing knowledge and technology. Further, the two businesses could engage in cooperative advertising, with Lawry's paying for advertising containing the restaurant's name. Meanwhile, the restaurant could use table-top cards promoting Lawry's spices and recipes.

A joint venture might be created between a designer of heat-sensitive devices and a security firm to create a third company. That company might produce locks triggered by the thumbprint of a person using the door. The designer and the security firm may each have its own line of products but need the joint venture to create the new product.

These types of arrangements occur only when both companies have common goals, trust, ability to communicate and willingness to engage in an ongoing relationship, Esparza said. "It's as important as picking a life partner," she said. "You're marrying two organizations, and each is betting on the other's success."

Why do businesses enter into alliances?

Typically, it's because business owners want to reach new markets, get new capital sources, add management support and control the risk of embarking on any of these things by themselves.

The underlying motivation for an alliance is basically the market: The customer needs or wants something more, Esparza said. The market is demanding more from the business.

As a business owner, you should recognize this as an opportunity to grow. Opportunities also can present themselves when other companies approach you with an idea or after you've done strategic planning and have identified various areas for expansion, not all of which your company can do alone.

"That's where allies come in," Esparza said.

Because of the growing number of niche markets and specialization by business owners, no business by itself can reach all its potential customers, she said. That includes large corporations, which may want to align themselves with smaller companies that already are in these niche markets. A small business in a niche can also expand by aligning with a large corporation with more distribution and advertising resources. Likewise, small companies can team up with each other.

But business owners should not just jump at the chance to align with another company.

"You don't want to go to your worst competitor and tell them you need help in a certain area, because they might think it's a good business idea and just acquire you," Esparza said. "The best allies are often noncompetitive companies that share the same vision."

You need to thoroughly understand your own strengths and weaknesses and those of your partner. You need to make certain that the mission and the values of both companies are the same, complement each other or, at the least, don't conflict.

How do you find a company to work with?

That could involve strategic planning, research using the Internet, searching industry associations and finding individual referrals. What you are looking for is shared values and objectives and ease in working together as individuals or as a company, Esparza said.

Once you have found a company to work with, the nature of the agreement must be fleshed out. It should include the goal, the different responsibilities and contributions required of each company, the direct and indirect costs to participate in the alliance, how the companies will communicate with each other, benchmarks that need to be reached along the way, the limits of the arrangement and when the alliance begins and ends.

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