One method to scale your business quickly is to collaborate with other companies in similar but different sub-sectors. An alliance or joint venture is slower route to growth than an acquisition, but is usually faster and less risky than relying on organic growth.
A strategic alliance allows two or more companies to pursue growth without one or the other being acquired:
- A strategic alliance is an agreement between two or more parties to pursue common objectives whilst remaining independent companies.
Where there are more than two parties to the alliance, the group is often called a consortium.
The attractions of the strategic alliance is that it is relatively quick and it lets each of the parties can exploit a new opportunity whilst maintaining their independence. In practical terms:
- None of the parties have to open up their financials to the others, and
- Each party can take advantage of the other’s investment in fixed costs to carry out a necessary function.
Where costs are fixed (i.e.: for a full-time sales team), one driver for a strategic alliance is maximizing the marginal contribution to those fixed costs. This means increasing sales. So if you have a sales team in your state or country, and your prospective alliance partner has a sales team in its state or country selling similar but not competing products, why not simply sell each other’s products instead of setting up competing sales teams?
Different Skill Sets Needed
The interesting thing about alliances is that they call on different skill set within the alliance partners. Whereas organic growth is all about competing effectively against other organisations, alliances are about collaborating with another independent organisation first and then competing together against other organisations. This means you need to have people who not only have the normal competitive skill sets, but who also have collaborative skills. These people are often generalists, outgoing and socially adept.
Two Main Types of Ownership in Strategic Alliances
The two main types of strategic alliances are:
- Equity ownership of shares or securities in an incorporated joint venture vehicle, and
- Non-equity alliances based on contracts between the parties rather than ownership of a joint venture company.
Of the two, the non-equity alliance is usually viewed as easier to set up and less formal.
Drivers for Strategic Alliances
In the broad sense, businesses seek out strategic alliances to gain or extend a strategic advantage and to do it:
- More quickly than through organic growth, and
- With less commitment than a takeover or acquisition.
The most common drivers to form a strategic alliance are these:
- Complementary alliances: Where the parties are in similar sub-sectors but service different parts of a target customer’s spectrum of needs, one party will often fill in the gaps in the other party’s offering, and vice versa. For example, an investment advisory firm is trusted with customers’ investment decisions, but each of these decisions results in a tax consequence. An accounting firm is trusted with a customer’s tax advice, but this advice is dependent on the tax consequences of the investment advisory firm’s advice. A complementary alliance is when the investment advice is integrated with the tax advice so that no investment is made or realised before the tax advice is first obtained.
- Scale alliances: Here the assets, competencies and relationships of each party might be similar, but the combination of them gives each party the scale it needs to compete effectively. “Scale” can be in relation to acquiring inputs for manufacture, reducing costs through bulk purchases, or combining sales teams in different territories.
- Access alliances: Where one party having goods or services to sell seeks another party which has access to customers who need those goods or services. For example, an investment advisory firm might seek access to the accountant firm’s clients in order to sell its investment advice. Another example is when there are economic or geographical barriers to sale. Here a western company may seek an alliance with a Middle Eastern company to sell products or services in the Middle East because there is a law saying that every foreign company must have a 51% Middle Eastern resident company as a partner. “Access” can also refer to access to patents, trade marks or technology. Here the IP owner might seek out a distributor in a territory to sell products and services under a licence.
Another driver for strategic alliances might be the desire to control a market, but collusive behaviour is outlawed in most jurisdictions.
Decision Making Process
A decision matrix can be used to decide whether a strategic alliance is the best solution:
- Ascertainabilty of the resource: If the potential partner’s strategic resource is its only resource, or if it is inextricably intermixed in the potential partner’s business, then an acquisition might be better. If, however, the resource is discrete or contained in a division, then a strategic alliance might be better. For example, if the accounting firm were totally devoted to investment tax advice, then the investment advisor might consider acquiring the whole firm. If, however, investment tax advice were simply a discrete division of the accounting firm, then an alliance with that division might be far better than acquiring the whole firm.
- Strategic importance of the resource: If the potential partner’s resource is non-renewable, protected by strong IP, or not capable of being duplicated, an acquisition might be the best solution. Where, however, it consists of a particular skill set or database or reproducible IP, a strategic alliance is probably a better way forward. For example, the investment advisor does not have the accounting skills or customer database of the accounting firm, but then again, there are other accounting firms and databases in town that could be alternative partners. So acquisition of the accounting firm is not a high priority. It would be different if the investment advisor was considering integrating with Xero or MYOB – each of these are entire software companies with strong IP and very sticky client databases that can’t effectively be reproduced. In either of these cases, acquisition would be better – assuming the investment advisor had a couple of billion dollars to spend on an acquisition.
- Need for speed in execution: If there is a small window for exploiting the corporate opportunity and the space is filling fast with competitors, then an acquisition might be the fastest route to growth. “Acquisition” here does not have to be the acquisition of the entire target. It could be simply the acquisition of that division. Where, however, a more measured approach can be taken, or the opportunity is simply a component of each party’s growth strategy, a strategic alliance is probably more appropriate. Strategic alliances can take more time to set up than an acquisition, but still be a lot faster than organic growth.
- Uncertainty: Where either the opportunity or the market is uncertain, an acquisition is probably not appropriate and a strategic alliance would be wiser until things become clearer. If the alliance works, an acquisition can easily follow.
- Valuations: Where a target has hard assets such as property or inventory, valuations are easier and the scope for paying too much is less. In these cases, acquisitions might be better. Where, however, the assets are “soft” and are composed largely of people and relationships, valuations are difficult. There is therefore a high risk of paying money for assets who walk out the door every night at five o’clock. In these cases, strategic alliances may be better.
The spectrum of growth is usually characterised in terms of speed with:
- Acquisition being the fastest,
- Organic growth being the slowest, and
- Strategic alliances somewhere in the middle.
Strategic alliances, however, have the advantage of reducing the risk of uncertainty in the market or the opportunity, providing the ability to scale up quickly and to obviate the need for valuations. They are particularly useful when “soft” assets such as skilled staff and relationship marketing are involved. They are also extremely useful in getting prospective acquirers closer to your business in the years before a business exit.