If you answered that question, “not so great” you are not alone. Strategic alliances (often referred to as partnerships) can be very effective ways to achieve a goal or goals that you might not be able to achieve on your own, but they do not always work. Before we tell you why they are difficult to execute and how you can make them work better for you, let’s take a look at what a strategic alliance is and how you can use them.
A strategic alliance happens when your company and another company enter into an agreement to do something together. That “something” is more than likely something that you or the other guy cannot do on you own or cannot do as fast on your own or don’t want to do on your own or are afraid to do on your own.
Examples include:
- Gain access to new customers
- Expand into new geographic markets or product markets
- Gain access to new technology (licensing)
- Increase capacity to compete for larger customers
- Gain access to better or different talent pools
- Obtain competitive advantages
Let’s say that you and a potential strategic partner sit down over a beer and decide that, for whatever reason, a strategic alliance might be a good idea for both companies. What is the first step? Our advice is to negotiate a term sheet to summarize the most important aspects of the relationship.
A term sheet simply allows you and your potential partners to:
- Determine if there really is a common purpose. Are you considering this alliance for mutually compatible reasons?
- Agree on who will do what, and when. How will progress be measured?
- Decide how long this partnership should last. Should it last for a specific period of time, or until a specific goal is achieved, or forever?
- Agree on what each partner will contribute towards achievement of the goal. People, capital, other resources?
- Agree on how the benefits that derive from the alliance are to be shared.
- Agree on the decision making process. Will various decisions be made unilaterally or jointly or both?
- Agree on how you will settle disputes and disagreements.
- Agree on what happens when the partnership ends.
If, after you have prepared the term sheet, you and your potential partner still think that the alliance is a good idea, the next step before you ask one of your lawyers to write an agreement is to prepare a business plan. Why will you need a business plan? Because at this point you may have some idea where you want to go, but you have no idea how you are going to get there. And, of course now that you and your partner have hatched this great idea, don’t you think it would be a good idea to communicate the specifics of the alliance to your employees, bankers, investors, and other stakeholders? That’s why.
Your business plan will allow you to:
- Determine specific, achievable goals.
- Determine the strategies that will enable your partnership to achieve its goals.
- Clearly understand your alliance’s strengths, weaknesses, opportunities, and threats.
- Clearly define the target market in as much detail as possible.
- Decide how you will react to the competition and how they will react to you now that you have joined forces.
- Create the marketing and sales strategies that will inform your target customers that you are on your way and what you are offering that will be of benefit to them.
- Provide an understanding of the human and financial resources that will be committed to the alliance.
- Forecast the financial consequences of the strategic alliance’s success.
At the beginning of this piece we suggested that strategic alliances don’t often work out too well. Often, that’s because the joint venture didn’t have a feasible business plan. So before you sign a deal, make sure you first undertake a thorough planning process.