Teaming up with other businesses through strategic alliances or joint ventures provides the opportunity to collaborate and share both the risks and opportunities when entering a new market.
Strategic alliances
Teaming up in a strategic alliance refers to a collaborative effort between two or more companies, taking various forms such as:
- Technology transfer
- Purchasing and distribution agreements
- Marketing and promotional collaboration
- Joint product development
In such alliances, each partner typically maintains their independence while working towards a shared goal.
On the other hand, a joint venture involves a long-term investment of funds, facilities, and resources by two or more companies into a joint undertaking that benefits all parties involved. In a joint venture, each company holds an equity stake in the new venture.
A joint venture can be established for various purposes, such as:
- Operating production facilities in a foreign country
- Establishing a marketing and distribution presence
- Use complementary technologies possessed by each participant
Joint ventures can serve as a means to overcome trade barriers imposed by certain countries. In certain situations, entering overseas markets may necessitate forming a joint venture with a local company.
Why consider a strategic alliance or joint venture?
Establishing a business relationship with one or more partners can offer several advantages. It may grant you access to their technologies or patented processes. Alternatively, it could provide you with an opportunity to tap into their distribution network.
When considering a partnership, it is essential to evaluate your strengths and weaknesses in relation to your potential partner. An ideal partnership leverages your core competencies while strengthening areas of your business that may be weaker.
Advantages and disadvantages of working with a partner
Carefully selected partnerships can offer benefits.
- Share the risks – collaborating in partnership enables you to mitigate your market exposure.
- Opportunities for growth – gaining access to your partner’s distribution networks can accelerate your market share expansion compared to going solo.
- Access resources – your partner may assist you by providing access to resources like skilled personnel, financing, and technology.
- Access the target market – collaborating with a local partner might be the sole means to reach your intended market.
Drawbacks of collaborating with a partner include:
- Reduced profit – since profits are divided among partners, it may take longer to recoup your investment.
- Disputes – if the partnership deteriorates, disputes may arise concerning ownership of intellectual property (IP) and jointly developed products.
- Cultural challenges – working with an overseas or differently sized company can introduce cultural differences in business practices, posing potential difficulties.
- High level of commitment — establishing a successful partnership necessitates a considerable level of commitment in terms of financial investment and management time.
- Overpowered by the partner – partnering with a larger company puts you at risk of being overwhelmed and pressured into following the larger partner’s preferred direction.
Choosing the right partner and making the partnership work
If a partnership falls apart, it can be costly and time-consuming to recover. It is crucial to invest sufficient time in researching and evaluating potential partners. Establishing a formal arrangement with a familiar partner can be a viable solution. For instance, you may consider formalising your relationship with an overseas agent or distributor.
There are simple measures that can mitigate the likelihood of encountering problems within a partnership.
Conduct thorough research and evaluation of a potential partner. Assess if their objectives and values align with your own business. Take into account the following:
- How well do they perform?
- Will they demonstrate the same level of commitment to the venture?
- Do you trust them?
- Are they financially stable?
- What is the feedback from their customers?
- Do they have any existing partnerships that could create conflicts of interest?
- Establish a personal connection between yourself and the other party. Invest time in getting to know and understand your potential partner.
- Ensure that all partners have a voice in the management decisions of the partnership. Keep communication channels open.
- Determine the reporting methods, milestones, and goals for the partnership. Agree in advance on the course of action if these goals are not met.
- Pre-establish the methods of arbitration in case of a dispute between partners.
- Obtain a written agreement between the partners. Since strategic alliances are typically less formal than joint ventures, an exchange of letters can serve as a sufficient written agreement. However, in the case of a joint venture, a joint venture agreement should be signed by both parties.
Partnering with overseas businesses
Engaging in overseas partnerships can be intricate and potentially expensive if issues arise. It is essential to seek ample advice before entering into any partnership arrangement. Here are some recommended sources of information:
- Market research – consult with export and marketing experts.
- Finding and evaluating a partner — international accountancy firms, international legal firms, international banks, and venture capitalists.
- Intellectual property (IP) protection – consult with patent attorneys.
Negotiating an agreement – seek legal counsel from lawyers specialising in international contract law (look for a firm experienced in the specific country where you intend to conduct business).
Exporting with NZTE — New Zealand Trader and Enterprise
How we help exporters — Ministry of Foreign Investment and Trade
Tip
A reliable partner will possess complementary strengths that allow you to concentrate on the core competencies of your business.
For instance, you can dedicate your efforts to product development while your partner takes charge of sales and marketing activities.
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