One
of the biggest struggles within the small business community is
attracting new, profitable revenue without sacrificing margin;
and accomplishing this with as little capital as possible. Most
small business owners seek the solution internally through lower
prices, increased advertising, increased sales incentives, etc.
Because immediate results are the goal, many overlook external
options.
While not an immediate cure, many small businesses have turned
to strategic partnerships and alliances to add value and competitive
advantage. According to the management consulting firm of Booz,
Allen and Hamilton, these companies presently attribute 18% to
25% of their revenues to the success of their alliance strategies.
What
is a Strategic Alliance?
A strategic alliance is an arrangement (written or verbal) between
two companies that combine resources to gain a competitive advantage
resulting in improved levels of business. The key to approaching
any alliance is that both companies must benefit. The result of
a successful alliance creates greater value to the customer, the
kind of value the competition cannot readily replicate.
Sometimes, alliances are created to reduce costs. This is often
seen with manufacturers. For example a manufacturer may commit
to using one outsourcing company based on a fixed price per unit
versus their usual hourly shop-rate. The manufacturer is thereby
able to eliminate or deploy assets elsewhere while reducing variable
expenses on each unit sold. The outsourcing company benefits from
the additional increase in work to address capacity concerns.
Other companies join forces to enter new markets, share financial
risks, and/or get products to market faster.
The
thing to remember is that there is only one rule when it comes
to alliances: The alliance must create additional value to the
customer-value that will either convert competitors' customers
or a value that existing customers will pay more money to receive.
If this rule is not followed, the plan is flawed from the outset.
Understanding the target market is the key. How can you combine
resources with another company to reduce the overall cost to the
customer or provide the customer with other benefits they need,
want and will cause them to seek you out or pay a premium to receive?
Herein
lies the dilemma
One
might assume customers will pay more for a product that weighs
less, has an increased life, and so forth, only to find in reality
that they won't. The customers may believe the product is better,
but are unwilling to pay more for these specific improvements.
Therefore, it is paramount to first determine what benefits customers
will pay more for and/or cause competitor customers to change
suppliers before making any plans to seek out a partner.
When considering an alliance of any kind, have a goal. If the
goal is to diversify, the strategy may be different from one that
seeks to increase the average purchase per customer or convert
competitor customers. To have a successful alliance strategy,
your assumptions relative to your target market must be correct.
This will be the topic of the next RS Management Group
newsletter.
Remember, there is no single alliance strategy that is best. Every
company has multiple avenues to consider. Here is a brief list
of potential strategies:
- Expand
revenue per purchase
|
- Convert
competitors' customers
|
- Diversify
into a new market
|
- Diversify
within the same market
|
- Reduce
variable expenses to gain pricing advantage
|
- Partner
with a brand leader to create prestige value
|
- Create
cross-sector partnerships with associations, non- profits
|
- Create
competitor alliances to borrow excess capacity versus
adding it internally
|
- Implement
cross-marketing with a different business type to pool
resources and jointly market to a new customer base
|
Dick
Spies is president and founder of RS Management Group, a specialty
consulting firm that works exclusively with owners of privately-held
companies. RS Management Group's focus is to implement growth
and transition strategies to increase the value and worth of a
company and to position the company for a successful transition
of ownership in the future. RS Management Group specializes in
exit planning, business valuations, mergers and acquisitions,
and financing and business consulting. Contact Dick at rspies@cinci.rr.com.
