Small Business Benefits of Strategic Alliances and Joint Ventures

strategic alliances and joint ventures

Strategic alliance. Joint venture. You’ve probably heard these terms quite frequently used in reference to large public companies like Apple, Coca-Cola, and American Airlines. In broad terms, both are a kind of partnership, a cooperation between companies in the pursuit of mutually-beneficial outcomes. This cooperation can manifest itself in various ways depending on the resources and goals of the companies involved.

According to recent Bain & Co. research, cooperative alliances are sweeping the world of big business as a way for companies to access new markets, streamline research and development, and complement organic growth.

However, the benefits of joint ventures and strategic alliances don’t need to be the exclusive purview of big business! Small businesses stand to gain immensely from tapping into the hidden potential of strategic alliances and joint ventures, what we might call single-purpose partnerships. By teaming up with other businesses, either in a looser strategic alliance or in a more formal joint venture, small businesses can increase their competitive advantages in the face of increasing pressure from big businesses.

What’s the Difference between a Strategic Alliance and a Joint Venture?

First, we need to get as clear as we can on the difference between a strategic alliance and a joint venture (JV). Many people will use these two terms interchangeably when speaking loosely about business relationships—a similar thing happens when “corporation” is used as a stand in for all business entities. Now, I’m assuming no malintent on the part of these people, but their imprecision can create confusion, which we certainly need to clear away.

Strategic Alliance

As I said, both of these relationships can be called a “partnership” insofar as we are describing a collaborative business relationship. But strategic alliances tend to be more free-form and open-ended and don’t typically involve a separate business entity; companies look to synergize their respective strengths to seize new business opportunities that they couldn’t tackle alone.

For example, think about the last time you took a trip to Barnes & Noble. I know that every time I’m there, the wonderful smell of fresh-brewed Starbucks coffee wafts through the air and sends me running for the café. The reason so many Barnes & Noble stores have Starbucks in them is that the two companies created a strategic alliance—in this case, it’s actually a licensing arrangement (that’s why your Starbucks gift cards don’t work at the Barnes & Nobel café!)

So, we see how these companies identified a potential area for business growth, acknowledge the gaps in their capabilities, and realized that a collaboration with another business will be beneficial. Both companies admit that people like drinking coffee while they sit and read, but Starbucks isn’t going to open up a nation-wide string of book stores, and Barnes & Noble isn’t going to start its own coffee brand. Starbucks wants to sell more coffee, Barnes & Noble wants to offer a gourmet coffee experience to entice customers to read and buy more books: that’s a win-win.

Joint Venture

In a joint venture, on the other hand, the two companies typically decide to create a third, jointly-owned company (or general partnership) to achieve a common business objective. But, importantly, this objective is focused and singular. Each of the companies contributes resources to the new business venture, and they decide internally on how the profits, losses, management, and control of that venture should be divided. At the risk of this article sounding like an ad for Starbucks, let’s look at another way that it successfully used one of these collaborations.

In 1994, Starbucks and Pepsi partnered up in a joint venture to create ready-to-drink coffee products. They formed the subsidiary company, the North American Coffee Partnership, to develop and then distribute their flagship product, the bottled Frappuccino. Starbucks got access to the bottled-beverage market, and Pepsi gained a new product with a well-known brand name. According to Pepsi, the partrnership’s line of Frappuccino drinks holds over 95% of the market share for ready-to-drink coffee beverages.

To recap, at the end of the day both strategic alliances and joint ventures are “partnerships.” The fundamental difference is that a joint venture is a single-purpose partnership, a business relationship established for one project or undertaking.

The Reese’s Effect: Is It Right for Me?

Now that we’re able to differentiate these types of partnerships a little better, let’s look more closely at how exactly these partnership arrangements could benefit your business.

When deciding whether your business would benefit from engaging in a strategic alliance or joint venture with another company, you should consider something I call the “Reese’s effect.” In short, this is when two good things (in this case, chocolate and peanut butter) come together and the combination is even better than the individual things. Both Chocolate and Peanut Butter bring mutually-beneficial qualities to the partnership.

Here are some things to consider before seeking out this kind of partnership:

  1. Your product cycle: Understanding the lifecycle of your company’s product is key to deciding whether such partnerships will benefit your company. Companies with products in different lifecycles will seek out strategic alliances and joint ventures for different reasons. For example, companies with products that have a fast lifecycle must constantly put out new and improved products or services to maintain a competitive advantage. So, they will establish collaborative relationships to develop new services, share R&D costs, and simplify market penetration. On the other hand, a company whose product has a little slower lifecycle might seek out a joint venture to gain market share, combine resources for larger projects, or get access to complementary resources.
  2. A clear understanding of your goals: You and your management team should pinpoint the benefits you want to get from the partnership arrangement and clearly outline how the strategic alliance or joint venture will achieve those goals. Being able to clearly articulate these points to yourself, will make it much easier to communicate the advantages to a potential collaborator.
  3. Company culture: Increasingly, companies are spending time and resources on developing unique company cultures that showcase who they are and what they believe in. But even if your company doesn’t have an explicit manifesto like Google, you probably still have a work culture and management style that’s important—or at least familiar—to you and your staff. When your team up with another company, you want to make sure that you have compatible company cultures and management styles. Cultural incompatibility could quickly ruin your partnership.

Securing Your New Strategic Alliance or Joint Venture

After you’ve identified how your small business would benefit from a collaborative relationship with another business and you’ve decided to move forward, it’s important to take a minute to assess the risks inherent in such a business partnership and how to protect against them.

We will go into more of the legal ramifications of joint ventures in a separate article, but for now do note that joint ventures and partnerships are governed by many of the same laws, and little more than a verbal agreement between two parties to pursue an activity for profit is required to establish a partnership from a legal perspective. No written agreement is needed. There isn’t even a requirement that the partners intend to form a partnership. All that’s needed is an intention to co-own a business for profit.

The upshot is that you must be deliberate about your strategic alliances and joint ventures. You don’t want to “accidentally” find yourself in a legal partnership with another business or business owner for the following reasons:

  • Fiduciary duty. Under Florida law, each partner in a joint venture owes a duty of the “finest and highest loyalty” to every other partner. You may know this and be willing to abide by this, but don’t assume other people will.
  • No liability protection. Partnerships don’t generally have liability protections for the partners. If you aren’t intentional and cautious, you can find yourself and your business open to creditors and debts incurred by other partners in the joint venture. This risk can be easily averted by establishing a separate business entity that has liability protections (e.g. LLC, corporation).

Like with any partnership, the best way to protect yourself is with a comprehensive written agreement. Whether you’re setting up a looser strategic alliance, putting together a joint venture without a separate business entity, or forming a joint venture that will establish a subsidiary company to do the work of the venture, be sure to have a detailed and granular discussion about the business relationship beforehand. All of the terms and conditions, and any other issues, should be clearly detailed in a written strategic alliance agreement or joint venture agreement.

Key provisions and issues for your joint venture agreement include:

  • Specific business objectives
  • Structure of the joint venture
  • Contributions of each party (including cash, property, assets, etc.)
  • Description of management and control
  • Description of how profits, losses, liabilities, and benefits are shared
  • Intellectual property assignment
  • Dispute resolution mechanisms
  • Duration and termination procedures
  • Restrictive covenants

This is by no means a comprehensive list. Each joint venture or strategic alliance will be different, and the provisions of the agreement will need to match the facts and circumstances of the partnership arrangement itself.

Carpe the Opportunity

Despite most often being associated with the world of big business, strategic alliances and joint ventures can be just as profitable and beneficial for small businesses. When small businesses develop properly planned collaborative relationships, they can create win-win scenarios.

Small businesses have traditionally shied away from strategic alliances and joint ventures despite the potential they hold for optimizing costs, accessing new markets, and growing a business. My hope is that with a better understanding of what these various partnership structures are, how they differ from one another, and how to use them safely, you will be more comfortable exploring strategic alliances and joint ventures for your business.

When you are ready benefit from these big business partnership tactics, call us at 407-649-7777 or email a team member. We can assist you in planning, strategizing, and implementing your next joint venture, as well as in drafting a comprehensive joint venture agreement made to suit the specifics of your deal.

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