In an increasingly competitive marketplace, businesses must search for every advantage they can find. More and more businesses are turning to strategic alliances.
“Strategic alliances come in many configurations, depending upon the amount of risk and reward that the parties are willing to share,” says Fred Leffler, a corporate attorney with Roetzel & Andress, L.P.A. “A strategic alliance can be a great vehicle to get into new markets, to access resources needed to seize opportunities, and to improve effectiveness with suppliers. However, as with any new initiative, how you approach and implement this tool plays a critical role in whether or not your strategic alliance is a success.”
Smart Business interviewed Leffler about the advantages of forming strategic alliances.
What is a ‘strategic alliance?’
A strategic alliance is a relationship with another party in which risks and rewards are shared to meet related objectives. These can be through noncontractural arrangements where parties share common business or technological platforms and each member controls its own activities. Increased interrelation between the parties is created through allocation of expenses and profits, and granting of exclusive rights. The most complex form of a strategic alliance is a joint venture, in which the parties create a new entity and invest the resources necessary for it to operate.
Alliances should be viewed as being on a continuum, based upon how interconnected the parties are, and how much risk and reward they share.
Why are businesses increasingly turning to strategic alliances?
The advantage alliances have over organic growth or an acquisition is that businesses can enter new markets, access new skills and leverage their relationships with customers and suppliers with a reduced investment. Over the last 10 to 15 years, we increasingly have seen companies interweave their products and services with others. We also have seen companies cooperating with others to develop new technology through joint ventures and research consortiums as a means to increase the breadth of products and services they can offer. In addition to a dramatic increase in the use of collective buying power for commonly used goods and services, businesses have consolidated their relationships with key customers/vendors to reap added benefits from those relationships. Using these methods, both sides reach their objectives faster and with reduced risk.
How are successful strategic alliances structured?
Before pursuing a strategic alliance, determine whether this is the ideal vehicle to meet your objective. Alliances are valuable to access new products, markets and skills with reduced risk. However, you must be willing to share the control and reward that comes with the project. Alliances should not be used if you are looking to obtain an asset that is undervalued or requires improvement, or if you are not willing share the control or reward related to the project.
Next, find the right alliance partner. The entity should be strong (financially and functionally) and be complementary to your business (both in operations and in culture). Most importantly, there must be a sound relationship with top management. If you choose the wrong partner, the likelihood the alliance will be successful is questionable.
Once you have determined the right path and the right partner, structure and manage the alliance. Attend to the business issues first, and then address the legal and financial arrangements. Establish a clear plan for making decisions regarding the project. Research shows that, when each side has an equal amount of investment in the alliance and an equal amount of control, the likelihood of the alliance being a success increases. Also, plan for the evolution of the alliance and the bargaining power of each of the parties. In most cases, there will likely be a shift in each side’s bargaining power as the relationship develops.
Address other issues related to the evolution of the alliance, and, ultimately, how it will be concluded. Remember: once you conclude the negotiations, only then does the relationship really begin. After you have created the structure, enforce the processes that have been negotiated in a disciplined fashion and build the internal capabilities of the alliance.
Alliances are a great way to work with other businesses to increase the scope and effectiveness of your business. However, for a strategic alliance to be a success, pay attention to particular issues as you negotiate and structure the project. If used correctly, a strategic alliance can become a powerful tool.
FRED LEFFLER is a partner with the Business Services Group, Roetzel & Andress, L.P.A. His practice focuses on corporate and international transactions, including structuring, negotiating and documenting strategic alliances, acquisitions and dispositions of businesses.