Partnerships can take many forms, but they all have one major goal: strategic strengthening while minimizing risk. Therefore, identifying both strengths and risks are equally important.
Forming partnerships is a common business strategy for generating mutual benefits for the companies involved. They often represent collaborations between competitors, meaning the companies are agreeing to share profits as well as risks. Convincing another firm to enter a partnership is not always easy because it usually requires a willingness to give up some trade secrets and control, while assuming a share of the risk at a financial price. That is why large corporations often tend to choose mergers and acquisitions as their route to gaining market share or innovation. They are able to retain control in exchange for assuming all the risk. For smaller businesses, partnerships make better sense because they limit risk while creating a larger pool of resources, and they require less permanent investment. However, smaller businesses can still learn from the successes and mistakes of the big companies.
Given the economic difficulties that persist today, it is not surprising that large corporations are going through a series of mergers and acquisitions, partnering, and joint ventures. Pooling assets is a common strategy for growing a business or entering a market. A good example is the 2008 Belgian company InBev buyout of the U.S. brewery firm Anheuser-Busch. In one fell swoop, InBev gained access to the largest beer market in North America; however, even the brewer giant InBev faced significant risks besides the obvious financial ones. What if the U.S. market resented the buyout because Anheuser-Busch is not just any brewer? It has roots in American history, having been started by a German immigrant in the mid 1800s.
As it turned out, there was consumer resentment, coupled with a new fascination for specialty beers. As a result, the sales of Budweiser, Anheuser-Busch’s best selling product, have significantly fallen since the acquisition. It is all in a day’s business when companies join forces, no matter what form the joining takes.
Creating a Stronger ‘Whole’
Small to medium sized enterprises (SMEs) can learn much by watching the corporate giants. Mergers and acquisitions are not legal partnerships, per se, but they represent the joining of two companies to enhance competitive strengths. Partnerships take the form of joint ventures, outsourcing agreements, cooperative projects, product licensing, or partnerships. In each case, the alliance is intended to create a stronger whole based on the parts, which was InBev’s ultimate goal. The parts may be types of technology or technological knowledge, market share, market location (global versus domestic), brand positioning, specific competencies, operational efficiencies, scale, procurement, or financing for product development or sales. In some cases, partnering is a way to ‘shake up’ a company to encourage innovation and creativity, but it must still be a financially viable option.
SMEs can partner with each other or with large corporations. Either way, the partnership will not come about unless there is a willingness on the part of each company to invest in the arrangement. Investments can be, and often are, monetary, but companies can also invest human resources, equipment, knowledge, and so on. One company may have a brilliant idea for a new software product but not have the technical capability to bring it to market. Each company working alone is capable of success, but it is the synergy that brings greater benefits to both companies. To convince a business that a partnership makes sense and justifies an investment requires two things. First, the benefits or synergies must be clearly identified and supported by the facts of the operations so that a win-win is created. Second, the assumed risks are identifiable and controllable to the largest extent possible.
Once the specific partnership synergy is identified - whether it is increased scale, increased market share, innovative product development, cost savings, capital access, and so on – the next step is ensuring the organizational culture and model supports the partnership. Right away, risks enter the picture. Are the business values similar? Who will be the decision-makers? Who will manage the joint effort? What happens in cases of disagreement? A potential partner may agree that goals could be met through a partnership that merges staff talent, but each will still want to know what the chances of loss are before committing resources. Two businesses could partner, give up trade secrets and make staff commitments that leave each potentially unable to maintain profitability.
Risk is a Two-Edged Sword
The interesting fact about risk is that it can derail a partnership, but it can also drive them to formation. One of the reasons businesses form partnerships in the first place is to minimize risk. Before a company is willing to invest in a partnership, both the probability and extent of possible loss, and the means for minimizing risk have to be identified because they work hand in hand. Minimizing risk means an effective strategic fit has been identified between the partners; the economic case is fully developed; and the organizational impact of the arrangement has been thoroughly assessed. Strategic risks are first identified and provide the context for operational risk assessment. Operational risks include financial, legal, technical, stakeholder, human resources, and procurement.
One of the issues that impacts both risk and investment is the scale of the partnership. Scale influences whether a risk is high or low. In a low risk partnership, there is usually a smaller investment, an easy entrance into the partnership, a clear exit strategy, clearly established objectives and responsibilities, and clear lines of accountability. Should the joint project fail, the risk of loss cannot ruin the pre-partnership businesses. A high risk partnership presents potential long-term threats to services, reputation, brand image, and financial viability, and can lead to the demise of the partnership and the pre-partnership businesses.
Partnerships offer a way to achieve strategic results not possible otherwise. However, they should not be entered lightly. Companies must have a shared vision and objectives and be able to identify a collaborative advantage by working together. The strategic dependence on each other is then measured in terms of risks. There must be a strategic fit, the ability to identify potential shortfalls, and an understanding of the full impact the partnership will have on the businesses in terms of people and finances.