When is an alliance with another SME appropriate? To grow, to enter other markets, to go abroad, to sell more …?
Cooperation among small and medium-sized enterprises has become a practical solution to enter new sales channels.
Why are brands like “El Ganso” and “Hawkers” joining forces to launch a new line of eyewear? What is behind this type of business alliance? There is a rigorous analysis, a little bit of heart and of course there is no lack of feeling. The trust component is fundamental in a business alliance.
Before entering into an alliance, it is essential to study the business model itself. It is vital to analyze in detail what you do and how you do it. Define what your production and distribution needs are and what customer segment you are targeting. Only after having studied the results can you detect when you need a partner.
It is important to be very critical when analyzing: Can I do it alone? Is it convenient for me or do I need a partner? Once the analysis is done, it is time to look for the ideal partner. To do so, take into account the following aspects:
- Your affinity and complementarity: the partner you choose must offer you that added value that complements you: brand, distribution channels, products, markets. Likewise, it is essential that they are similar to us in terms of working methods, objectives, vision and culture.
- Its solvency, quality and viability. When we present ourselves to a client offering a project, we respond not only with our own image of the quality of the service but also with that offered by our partner, which is why we must always be vigilant about the quality and solvency of the potential ally.
- Credibility. Study your partner’s track record in the market, find out about them by analysing their history.
The alliance must be mutually beneficial. It is a win-win, both parties should benefit equally from each other’s know-how, services and products.
- Be transparent. Put in writing the aspects related to the cooperation: confidentiality, sharing of costs and benefits, establishment of margins, obligations of each party, and also to whom to turn in case of disagreement (mediating body, arbitration).
- Define the right moment. You can anticipate the client’s needs by looking for an ally in order to improve your offer, but ideally you should do it when you have a real and concrete need, because it makes you more attractive to future partners.
- Equal strength. Both parties should have the same position of strength: if our partner is weak, it will damage our own prestige, if it is too strong, it will end up absorbing us.
What kind of alliances are appropriate?
The alliances you can enter into vary according to temporality and equity involvement. Some may be:
- Temporary. Defined as joint ventures. Several companies join forces to undertake a project. They usually bid for large public tenders.
- Permanent. When two companies establish a permanent alliance.
- Strategic. This is the one that unites two or more companies that are in competition with each other to develop a common project, such as clusters, purchasing groups or professional groups.
- One-off. One-off alliances are those in which two or three SMEs establish agreements in specific areas. The alliance is set in motion when a client asks them for this complement of activity. In the case of the Consortium, two or more companies join together to develop a project within a specific period of time and each entity maintains its legal nature. In the consortium, all the members are jointly and severally liable, whereas in the UTE, the liability of the partners is prorated according to the percentage of participation.
- Joint venture. It can be contractual or equity. In both cases the partners are jointly and severally liable. If it is contractual, a community of interests is established without giving it a legal nature. In an equity joint venture, a third company is created in which the partners have a shareholding; it has its own legal nature.
Co-branding is the union of two brands in order to obtain a benefit. It can occur in products (either by creating a new one or as a host of other brands), in shopping cards or credit cards (loyalty cards) and co-branding on the Internet (banners and partners).
Always have agreements in writing
It is important to carefully analyze all aspects of the agreement, especially with regard to the sharing of costs and benefits. Put all clauses in writing. The most common forms of alliances are:
- Private agreements. Whether or not they are notarized. All aspects related to the relationship must be included: obligations, contributions, limitations…
- Exchange of actions. In the case of strategic or permanent alliances when there is a more global objective rather than a specific project. Merger and takeover would be the final course.
- In the form of a partnership. This is the case for joint ventures. The new company would have its own statutes and its own board of directors.
- Verbal agreement. In the case of less formal alliances.
Conquering new worlds
The best way to go abroad is through business cooperation:
- Knowledge of the culture. In many countries it is vital to have a local partner in order to establish business relations. It is also important to avoid communication problems.
- Local management. The local partner will have more experience in hiring suppliers as well as the workforce.
- Cost savings. The alliance with a local partner reduces travel costs and facilitates communication and logistics.
- Public entities. Public foreign promotion agencies have departments specialized in selecting partners.
- Trade fairs and congresses. There you will be able to analyze the market, discover the characteristics of your potential partners and establish direct contacts.
- Direct management. Travelling to the country. This is the most expensive way.
I provide the brains, you provide the money
As long as you are looking for a win-win situation, alliances to develop technological projects are very fruitful (licenses, patents, software…). Alliances between entrepreneurs and researchers, between computer programmers and distributors, consultants and software developers… There are three ways to achieve this:
- In the form of a strategic network, knowledge network or spider web. Alliances are created between two companies that in turn ally themselves with a third and this in turn with a fourth.
- With exchange of shares: the most commercial company participates in some way in the technical part, although the latter usually maintains the majority.
- Joint venture.
Your market is not my market, but I am interested in it
Co-branding enters different markets and different types of customers. One example is Coca-Cola when it teamed up with L’Oreal to launch a drink that helps nourish the skin. Another example is the creation of the Puma Phone (the sports brand’s mobile phone) and yet another example is Mango teaming up with Ford to launch a clothing collection for the launch of the Fiesta.
Extending local boundaries
You want to expand your business idea beyond your community because it has become established over the years. In this case, there are several formulas for cooperation between companies and partners:
- An agreement with a national distributor or with an entrepreneur compatible with you to extend your services to other autonomous communities.
- Strategic partnership. Often there are formulas such as a licensing agreement whereby you enter into a distribution and marketing agreement with a strategic partner. This is what the managers of El Niño did, for example, when in 2002 they were overwhelmed by the rapid growth of the brand. They looked for a partner specialized in the distribution of surf clothing and together they created El Secreto del Mar.
- Franchising: this is another very valid formula. It is cheaper than setting up your own branches, but the entrepreneur does not get the same benefits.
In order to be more relevant and reduce costs
We have combined the two options in the same section because in both cases what usually happens is a union of SMEs that are actually in competition with each other, but which assume that cooperation helps them to reduce logistical, marketing, production and distribution costs or allows them to gain more weight in the market.
The first case would correspond to purchasing groups, for example, the second to sectoral unions that join forces to tackle new markets or specific negotiations.
Seeking new marketing channels
Another reason for small and medium-sized enterprises to form alliances is the need to look for new distribution channels. This can be of several types:
- The traditional one. This consists of contacting a national distributor in the sector so that they can move the merchandise for a commission or a percentage of sales.
- With the big players: when you offer a specific product that may have a plus of originality, you can reach agreements with the big chains and stores. In this type of agreement, the great danger comes from the risk of monopolisation.
- Alternative channels. In these times it is necessary to sharpen your wits to get your product or service to the end customer. A valid formula is to go to specialized shops or establishments (if you have a health and wellness consultancy you can promote your services in gyms, spas, day care centers, for example) or in different media (vending machines with unsuspected products are becoming more and more common).
Partnerships that improve financing
In some cases, the alliance can favor financing conditions, especially in technological and innovative projects were aid and subsidies often favor business cooperation over the individual option.
Solutions for freelancers and micro-enterprises
For freelancers and micro-SMEs, the alliance is a possible solution for expanding their portfolio, especially if they are undertaking projects of a certain size.
There are two ways:
- One-off agreements. Alliances would be agreed for specific activities, not in all circumstances or for the whole business.
- Permanent collaboration. A union would be offered in all projects while maintaining the identity of each alliance partner.