INTERNATIONAL MGMT

Case 2: Can Little Fish Swim in a Big Pond? Strategic Alliance with a Big Fish

Globalization and the Internet have created unprecedented opportunities for small and medium-sized businesses in Canada – an environment where competition is fierce. To take advantage of these opportunities, while avoiding some of the competitive obstacles often faced by the little fish in the big ocean, many of these businesses are forming partnerships or, more precisely, strategic alliances.

“There are various advantages to forming strategic alliances,” says Estelle Metayer, president of Montreal-based Competia Inc., a leading competitive intelligence and strategic planning company and publisher of Competia Online. “One is the ability to penetrate markets that would be too costly to develop on your own. For example, if you form an alliance with an America partner who can take on your products and distribute them through their network, you could save a lot of money on the marketing side.” Another big advantage comes from joining forces with a business that can provide your enterprise with access to expensive technology you might not be able to afford otherwise.

Management-based strategic alliances are also advantageous, Ms. Metayer says. “Often, smaller companies don’t have big management teams. So if they need someone who has a certain expertise, but they really can’t afford to hire such a person, then they can form an alliance with a company that has that management expertise.”

Forming an alliance with a larger company is sometimes the only way to have access to the type of capital and resources they need to be able to grow, says Gary Shiff, a partner at the Toronto-based law firm Blake, Cassels & Graydon LLP. “For example, we have a client, a very small company of two people, and the only way it could get its product into the marketplace was to establish an alliance with a large company, which it did. The large company will give them a large sum of money. In return, our client will give up a lot of its equity – it will only own 30% or 40% — but over time, if the product is successful, our client can repurchase some of that equity,” Mr. Shiff says.

Strategic alliances also benefit the big companies. “With large corporations, one of the problems often is the inability to move quickly, because of bureaucracy and more complicated internal politics. Smaller companies are able to react more quickly to changes in the marketplace. So from both parties perspectives, it serves their needs,” he says.

Although the concept of a strategic alliance can sound so appealing to a struggling small business that they might be tempted to run out and get one, experts warn businesses should not rush into partnerships, especially if another company comes courting.

“As a small company, we get five or six requests for alliances a week from companies I don’t know anything about, and suddenly they want to form an alliance. So my advice is not to rush into an alliance. You have to be proactive,” Ms. Metayer warns.

The first step is to examine your business and determine what gaps need to be filled. “Say I’m a small company that is in textile products and I’m finding that to penetrate the U.S. market, I need to be very close to a furniture manufacturer, since they are the ones who will use my textiles. I might want to build an alliance with a big player in the U.S. , and thus be able to penetrate the large distribution channels.”

Once need is determined, the search for a partner can begin. “Alliances don’t work when you don’t know each other well,” Ms. Metayer says. Thorough research of a potential partner is critical. Check out a potential partner’s current viability, look into the company’s management style to see if it is compatible with yours, contact former partners, current and past clients and suppliers. “The way a company treats its suppliers can be indicative of how they will treat their partner.”

She also suggests a small business position itself as a client of a potential partner, to experience how the candidate treats its clients. Even after thorough research, do not rush into an alliance, she says. “Do a project together, for example, work together so you can really see if it works before you go on a larger scale. You also need to make sure legally you have a very tight agreement, in particular one that allows the alliance to dissolve easily. If it doesn’t work, you need to make sure you’ve planned for that.”

Besides legal advice, businesses entering into an alliance should seek out professional accounting advice, Mr. Shiff says. “A strategic alliance will have tax implications, and those tax issues need to be addressed right at the beginning.”

While rushing into an alliance can court a nasty breakup, choosing a partner that is so similar it could be a competitor is courting disaster, Ms. Metayer and Mr. Shiff concur.

“Go back to the example of the textile business—if you build an alliance with someone who builds the frames for the chairs, you’re never going to compete. But if you form an alliance with someone in the U.S. who also makes upholstery textile, eventually one or the other is going to say, ‘hey, I can do this by myself,’” Ms. Metayer says. The last thing any company needs is a rival who has intimate knowledge of its internal operations.

Questions:

1. Why would small companies want to form alliances with much bigger companies?

2. What risks do small companies face in forming such alliances?

3. Discuss how a company should approach the opportunity to form an alliance with another company.