Too Small to Prosper?

Even as small and medium-sized enterprises (SMEs) face tough odds today, there’s never been a better or more exciting time to be a small business owner, or a more critical time to begin transforming your company into a leader of the pack.

In her book, “Alpha Dogs”, author Donna Fenn states, “Every year, 10% of small businesses — a half million or so — shut down for good; a quarter of all businesses never make it past their second year; 60% close after six years.”

Successful small business owners are realizing that if they are going to make it, they are going to need help, and one of the places they are finding help is through the formation of small business alliances.

A Coopers & Lybrand study of 400 high-growth small firms found that those with strategic alliances experienced growth rates 20% higher than firms without such alliances, and about 11% more sales turnover.

A strategic alliance is a cooperative agreement with another company to combine resources in a way that is beneficial to both parties. Unlike a merger, both companies maintain their individual identities, goals, mission, etc. The purpose of the alliance is simply to create opportunities for the two companies to work together to achieve a specified goal: promotion, purchasing, product manufacturing, or something else entirely.

SMEs seeking alliances often think too small. Too often, a SME asks the potential partner for an endorsement in return for putting the partner’s logo on the company’s website. That’s not strategic.

And some think only of what the potential partner can do for their company. Strategic alliances have to create a situation where both parties gain something; otherwise, they’re not partnerships.

How to choose wisely? Begin by conducting a strategic analysis of the market sectors and target audiences that make the most sense for your business. What are the most profitable areas? Where is the greatest growth? Understand clearly where you are, so that you can find the partners that best complement you.

Once you’ve done the right analysis, ponder the following questions: What’s your gut feeling about the partner you’re considering? Is there synergy? Do your potential partners have a solid understanding of your objectives and goals, and are they genuinely excited about joining forces for an alliance?

However, more important than forming an alliance is how to manage one.

Too often, businesspeople get so caught up in the potential benefits of strategic partnerships that they neglect mundane but important management issues. “The first thing people talk about is ‘How will we make money? How will we split the pie up?'”, says Robert Porter Lynch, president of The Warren Co., a Providence, R.I. consulting firm. “Well, they haven’t even made the pie yet.” What’s more, the pie’s recipe is complicated. A trusting relationship, complementary products or services, and similar corporate cultures are important –but they aren’t enough to make an alliance succeed. You have to manage the details, too.

To succeed, alliances must penetrate organizations deeply, so that their goals are agreed upon at all levels. That lesson is especially important when small companies forge alliances with large corporations, where employees change positions often. “You should be dealing with at least two people,” says Jana Matthews, coauthor of “Winning Combinations.”

“If someone is enough of a risk taker to start an alliance with a small company, then it’s likely they’ll rise out of their current position.”

You must also control the flow of information — especially when dealing with larger competitors — and pay attention to your staff and middle managers and immediately deal with the difficulties they’re having with the relationship. Alliances sound great, but it all falls apart in the twinkling of an eye if the performance isn’t there.

Effective business alliances require attention to several facets. Strategic alliances are all about relationships because they’re built on trust, dedication, and mutual interests. Ask how you can enhance each other’s growth and profitability. Each party has to be prepared to dedicate resources and understand that strategic alliances take time to develop and time to maintain.

You can’t make an impact without the active engagement of the top people of the organizations involved. Together, what your potential partners tell you will not only give you clues to their needs, but also may influence your thinking in ways you’ve never even imagined.

And don’t shy away from seeking outside advice.

Engaging a mergers and acquisitions intermediary may even help you by poking holes in your plans and pointing out why the alliance might not work. “It’s such an advantage if you can get people to tell you where the problems might be,” says Stanford Business School lecturer Irv Grousbeck, a cofounder of Continental Cablevision. “Being surprised is the worst thing for an entrepreneur.”