Articles > Collaboration Amid COVID-19: Should SMEs Consider Strategic Alliances?

Collaboration Amid COVID-19: Should SMEs Consider Strategic Alliances?

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TheFinLab

Collaborations have become a mode of survival in times of pandemic. What about beyond – should SMEs consider strategic alliances to thrive?

 

SMEs looking to survive and thrive amid the COVID-19 storm must be flexible. And that includes not just thinking from the lens of competition, but collaboration as well. One example is strategic alliances.

In this article, we will take a look at the viability of this option for ensuring business continuity as well as provide a basic process that can help you establish a successful strategic alliance.

 

Strategic alliances 101

There are several forms of partnerships – more structured ones like joint ventures and equity alliances, where the former requires the setting up of a new company with ownership divided among both partners, and the latter involves one partner buying equity in the other (see a related article here).

A less defined kind of partnership would be strategic alliance. Here, while there is usually—but not always—some type of agreement to pool resources, individual independence is largely maintained and there is no need for the formation of a new company.

Regardless of the type of strategic alliance a business opts for, the goal is the same—mutual benefit. The nature of these mutual benefits will vary depending on the nature of your business, your chosen partner, and the goal of your alliance. But, in general, these benefits include:

  • Economies of scale (e.g. getting better pricing from suppliers by buying in bulk)
  • Access to knowledge and resources (e.g. complementary skills and technology)
  • Access to a larger customer base (increasing market share)
  • Access to complementary markets
  • Access to capital (e.g. via equity alliances)
  • Combining resources for larger projects
  • Reducing risk
  • Quicker product development and time to market

 

On top of all these, strategic alliances can typically be executed much quicker than mergers and acquisitions (M&As) and avoid any issues surrounding valuation (which might be depressed amid the COVID-19 crisis).

The scope of strategic alliances can be wide ranging and reap multiple benefits, as a result this form of partnerships have seen a surge in popularity. Although the business world is undoubtedly a competitive one, the trends are pointing toward collaboration as a means of gaining a competitive edge.

 

The trend supporting strategic alliances

A PwC survey found that from 2010 to 2017, the number of strategic alliances formed by global publicly listed companies more than quadrupled from about 1,500 to almost 7,000. The firm also noted that 71% of business leaders in Asia Pacific expected to make greater use of strategic alliances to break into foreign markets.

And KPMG’s 2018 Global CEO Outlook, which surveyed over 1,300 global CEOs, found that a third of them were prioritising strategic alliances—double the number of those focused on mergers and acquisitions.

Here are a couple examples. In 2018, three seemingly unrelated giants—Amazon, Berkshire Hathaway, and J.P. Morgan—formed a strategic alliance with the goal of cutting down healthcare costs for their combined 1.2 million employees. Closer to home in Singapore, UOB and Grab entered a strategic alliance in late 2018 to leverage UOB’s financial capabilities and Grab’s user base.

The Singapore government has also recognised that these benefits can apply to SMEs and have thus developed several initiatives towards that end. One is IMDA’s Capability Partnership Programme, which helps Singaporean media SMEs strengthen their capabilities by partnering with MNCs like WarnerMedia and ViacomCBS. Another is Enterprise Singapore’s Multichannel Ecommerce Platform Programme, which connects SMEs with partners that can help them list and sell their products on international marketplaces.

 

Risks to consider

While the benefits of strategic alliances are diverse, and the data indicates that they will only likely become more prevalent, they are not without their risks. Here are a few of the main risks to consider:

  • Dependence – one party might become dependent on the other, which would end up placing it in an inferior position
  • Misrepresentation – one party might misrepresent their situation to enter the alliance
  • Unfairness – the contributions of each party might be unequal, which might breed resentment
  • Inefficiency – while theoretically, combining resources should lead to increased efficiency, it doesn’t always work out this way in practice

Here’s one example of a strategic alliance that didn’t work out. In the 1990s, Asus—which at that time had yet to manufacture computers under its own brand—reached an agreement with Dell to supply it with motherboards. This eventually turned into a full outsourcing arrangement, where Asus was assembling the entire computer on behalf of Dell. This arrangement was highly profitable for Dell.

Then, in 2005, Asus decided it no longer needed Dell. Using everything it had learned from manufacturing Dell’s computers, it began manufacturing them under its own brand. It became a competitor. Not only was Dell forced to terminate the alliance, it also had to source for alternative manufacturers under pressure of time since Asus had been doing it for them for so long. Dell had become too dependent on Asus.

While Dell managed to overcome this, its example should be enough to highlight some of the risks inherent to strategic alliances. So, the question is—how can we mitigate these risks?

We recommend having a methodical approach to consider strategic alliances, and help you do two things simultaneously—determine whether a strategic alliance is right for your business and mitigate its inherent risks to maximise your chances of success.

 

A methodical approach for entering strategic alliances

While the variability in the strategic alliances model means that the “nitty gritty” details of the evaluation process will also vary, you can still use the same process for making high-level assessments. Here is a basic step process you can use as a template.

 

Step 1 – Understand your business’ competitive strengths and weaknesses

The first step is to understand your own business’ competitive position. This is the starting point for any fruitful strategic alliance. One simple way to do this is through a SWOT analysis. A couple guiding questions you can use are:

  • What opportunities are there in my business that I am currently unable to capitalise on?
  • What are my competitive weaknesses and threats that can be mitigated via an alliance?

 

Step 2 – Assess how candidates can complement those strengths

Next is looking at your pool of potential strategic alliance candidates and seeing how well they can add to your strengths or compensate for your weaknesses. Your candidate pool would greatly differ depending on your company, industry, and market—so it is imperative you do a thorough analysis in Step 1 to ensure you can properly identify and zoom into the right candidates.

 

Step 3 – Conduct due diligence

Once you’ve narrowed down the list, it’s time to begin due diligence. You would likely want to understand fundamentals like the financial position, mode of business operations etc, which is again dependant on the specific nature of your proposed alliance. While strategic alliances are built on trust, this saying also holds true: trust, but verify.

Now you should also begin negotiating the agreement. When doing so, use the next steps as a guide.

 

Step 4 – Set clear goals and performance targets

Within the agreement, you should set clear goals and performance targets. The specific goal of the alliance will also determine the structure of the partnership —whether by simple agreement for strategic alliance or a full-fledged joint venture. Performance targets are important to ensure both companies stay on track. Setting them from the beginning will also help mitigate risk down the line—particularly against any allegations of unfairness.

A few guiding questions you can use are:

  • What do both parties want to achieve from the alliance?
  • What are the targets we need to hit, and by when?

 

Step 5 – Determine governance processes

Governance processes will determine how both your businesses cooperate moving forward. This is an intensive step and it should not be rushed. Here are several guiding questions you can use:

  • What specific responsibilities is each company going to take on?
  • For joint decisions, what decision-making process will we follow?
  • When conflicts arise, how do we intend to resolve them?
  • If the alliance is not functioning as intended, what exit strategies can we put in place?

 

Conclusion – Strategic alliances are a viable option, but must be carefully considered

 

There is no doubt that strategic alliances are a viable option for business continuity amid the COVID-19 crisis. They are faster to execute than M&As, and the overall trend indicates this as a popular means of strengthening competitive positions for parties involved.

Strategic alliances also come with a level of risk. Use the approach above as a high-level guide to help you weigh the benefits and costs of a strategic alliance for your business. Every business is unique; a strategic alliance may be a good idea for one business, but not for another.

Without knowing your individual business needs, it is difficult to provide specific advice. So, if you are looking for more detailed guidance, join us as a member of The FinLab Online. Not only will we serve you more content that is relevant to your business, but we will refer you to a topical expert as well—just click here, and we hope to see you at The FinLab Online.

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