Strategic Alliances
Background
General Alliance Use
a. Types and Rates of Alliance Use
b. Prior Alliance Use
Size and Alliance Use
a. Responding Business Size and Alliance Use
b. Alliance Types and Partner Size
Specific Alliance Experience
a. History of the Alliance
b. Alliance Partners
c. Equity Involvement
d. Resource Commitments
e. Experience
f. Expectations for the Alliance
Final Comments
Background
The rapid pace of technology development and innovation, high costs of research and development, globalization of industries, rapidly changing trade constraints and barriers, and the rapid maturation of many industries have created a world in which cooperative behavior among small businesses may be becoming the rule rather than the exception. Strategic alliances, generally defined as relatively enduring agreements establishing exchange relationships between cooperating businesses, have grown almost tenfold in the past 20 years. These new organizational forms, centered upon cooperation among businesses, are necessitating a redefinition of our concepts of business size and scope -small businesses can now have the reach and impact of large businesses while large businesses can have the flexibility and innovation of small businesses. Past research and anecdotal reports of business activities suggest that small-business owners often enter alliance relationships to achieve specific strategic objectives, but even more often as a hedge against uncertainty or as a lifeline for a struggling business. These same reports suggest that a significant number of alliances fail. But is this the case? More importantly, do strategic alliances really offer small-business owners advantages that are worth the potential risks? This edition of the National Small Business Poll provides one of the first national surveys on small business Strategic Alliances, including alliance activities among small businesses, reviewing rates of alliance formation, types of alliance relationships, alliance partner sources and factors influencing alliance success. The focus of the survey is the alliance experiences of small manufacturers, but it also provides a comparison of those experiences to the alliance experiences of all types of small businesses.
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General Alliance Use
Strategic alliances between businesses take many forms ranging from very informal information- sharing cooperatives to extremely formal equity or contract-based relationships. The types of alliances most widely used by small businesses and their success are the primary questions addressed in two parallel surveys. The first was composed of 610 small manufacturing businesses with less than 250 employees (referred to as “small manufacturers” in this discussion), and the second was composed of 151 small businesses with less than 250 employees from all industries (referred to as “small businesses”).
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a. Types and Rates of Alliance Use
The type of alliance most widely utilized by small manufacturers appears to be long-term “production” agreements. Just less than one-quarter of respondents have at least one such alliance (Q#1F). Those in the smaller sample of 151 businesses of all types indicate that their most utilized alliances (33%) are long-term “licensing” agreements (not shown). Two alliance types are almost as widely used by manufacturers with nearly one-quarter indicating use of long-term “purchaser-supplier” agreements (Q#1I) such as “just-in time” supply alliances or “total quality management” relationships, and long-term “outside contracting” (Q#1J) relationships. Both long-term “outside contracting” and long-term “marketing” agreements (Q#1D) are used by over 25 percent of the small-business owner respondents. The least utilized alliance types by all businesses are process-based research and development (R&D) alliances (Q#1H) and franchise agreements (Q#1C). Although some alliance types are more extensively utilized than others, aggregate responses indicate that a significant number of small manufacturers (64%) and small businesses (63%) have some form of alliance experience and currently use a wide-range of alliance types.
Long-term licensing agreements are found in 20 percent of small manufacturers (Q#1A) and are the most utilized by small businesses. Such agreements make technology and/or unique know-how available to alliance partners. Not only are small businesses using long-term licensing agreements, but they are using them fairly extensively with well over half of all businesses with licensing alliances indicating three or more such relationships (51% for manufacturers and 57% for small businesses).
Export-import trading alliances provide partners with access to either markets or products external to their home markets. Almost 15 percent of the small manufacturers surveyed have such alliances (Q#1B). The results suggest that firm size is important in international trade alliances with over 22 percent of manufacturers having more than 20 employees utilizing alliances for export-import trading, while only about 11 percent of manufacturers having less than 10 employees use such alliances. The results also suggest that manufacturers have such alliances at a higher rate than small businesses where just over 7 percent report import-export alliances.
The least utilized alliance form for small manufacturers, as well as small businesses, is franchise agreements. Although often considered to be more “one-way” types of agreements, franchises generally establish resource-sharing relationships that are both contract-based and formal. Again, size seems to play a role with manufacturers. Those employing 20 people or more tend to have higher numbers of franchise relationships (Q#1E).
Marketing alliances are typically established in an effort to procure new customers and markets through increased capabilities and skills not currently held by the business. Seventeen (17) percent of small manufacturers report having at least one such alliance (Q#1D). Small-business owners appear to establish such alliances at a slightly higher rate with over 25 percent reporting at least one marketing alliance. The difference between manufacturers and small businesses (all industries) may be attributable to the smaller number of potential customers for most manufacturing businesses and thus a lower need for marketing alliances.
Over 20 percent of the small manufacturers report distribution-based alliances (Q#1E). Such alliances are typically established in order to provide channels not currently open to the business for distributing their products. Size once again appears to be an important factor. Smaller manufacturers tend to “go-it-alone” more so than larger manufacturers with just over 17 percent reporting at least one distribution alliance. The rate is virtually the same for small businesses as for manufacturers. However, it is assumed that more often than not, the small business provides the distribution channels (as opposed to the products that the manufacturers provide) as part of the alliance agreement.
Production alliances are typically established in order to acquire manufacturing capacity not currently available internally to the business or to provide excess manufacturing capacity for other businesses. Twenty-four (24) percent of small manufacturers report at least one production alliance (Q#1F). Not surprisingly, the rate of use for small manufacturers is considerably higher than for small businesses. Just over 11 percent of small-business owners report production alliances.
Technological innovation is often touted as the “holy-grail” for survival in many of today’s markets. In an effort to leverage limited resources in the innovation process, small businesses often reach out through research and development (R&D) alliances. These types of alliances typically take two forms—product-based and process-based. Twelve (12) percent of the small manufacturers hold at least one product-based R&D alliance (Q#1G) and 6 percent have process-based R&D alliances (Q#1H). These rates are similar for both manufacturers and small businesses.
Rationalizing resources has been a major consideration for most small-business owners in recent years. Oftentimes, specific alliance relationships are established in order to extend the resource capabilities of the business. These capability enhancements may be focused on eliminating waste in the production process or such endeavors as quality control. These types of alliances span the spectrum from agreements, establishing such programs as “just-in-time” delivery to “total quality management.” Twenty-two (22) percent of small manufacturers and almost 14 percent of small-business owners report such purchaser-supplier agreements (Q#1I). These findings suggest that small businesses’ suppliers and customers may generally expect the implementation of these types of programs to promote company goals, such as developing new resources.
Outside contracting agreements are sometimes more unidirectional in nature than other types of alliances and thus are often not considered as alliances. When these types of agreements are maintained for long periods of time however, they do take on many characteristics of more bidirectional relationships. When asked if they held “long-term” outside contracting agreements, 23 percent of the small manufacturers and over 28 percent of the small-business owners report such agreements (Q#1J). These findings show the trend for small businesses to look toward outside services, which often include human resource management, logistics, advertising and marketing, and other non-core functions.
Collectively, survey responses indicate that a significant number of small manufacturers and small businesses utilize alliances. The responses also suggest that the small-business owners who do hold alliances typically manage multiple alliance relationships. For almost every alliance type held by both groups, over 50 percent manage three or more such alliances. This use of multiple alliances and alliance types provides an indication that small-business owners seek diversification to avoid an over reliance on any one supplier or customer that might limit their future options.
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b. Prior Alliance Use
A number of the surveyed small manufacturers and small businesses do not hold alliance relationships (241 of the 610 responding small manufacturers indicate no current alliance relationships and 62 of the 151 small-business owners indicate no current alliance relationships). Many factors influence a small-business owner not to form an alliance. Of particular interest are those businesses that have had an alliance in the past, but whose owners have discontinued the alliance relationship and chosen not to form new ones.
Nine (9) percent of the small manufacturers report past, but not current, alliance use as did an almost identical percentage of the small-business owners (Q#2). Some of the more prevalent factors influencing them to refrain from using alliances may be a lack of resources (physical or knowledge-based), a lack of opportunity, or a lack of perceived need.
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Size and Alliance Use
Clear relationships appear between size – both the size of the responding small-business owner and the business size of the alliance partner - and alliance use.
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a. Responding Business Size and Alliance Use
The size of the respondent’s business appears to have an impact on the rates of alliance use. For almost every type of alliance the larger the respondent’s business, the more likely he/she is to report an alliance. The widest variance in use by size of the respondent’s business is in production alliances and purchaser-supplier alliances. This suggests that while all-sized businesses utilize alliances, resources do play a role in the decision of many business owners on forming alliances, the types of alliances formed, and the number of alliances managed at any one time. Larger businesses have more managerial resources and potential customers, both of which provide relatively more time or opportunity for investigating and establishing alliances. Smaller businesses are often “one person shops” and the owner/manager simply does not have the time or often the expertise to investigate alliance use or to manage an alliance once formed.
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b. Alliance Types and Partner Size
Small manufacturers tend to form alliances at virtually equal rates with larger and similar/ smaller-sized businesses for some alliance types. For others, there are important differences. Export-import trading alliances (Q#1B1), marketing alliances (Q#1D1), distribution alliances (Q#1E1), and production alliances (Q#1F1) tend to be formed as often with larger businesses as with similar/smaller-sized businesses. Licensing agreements (Q#1A1), franchise agreements (Q#1C1), product or service- based R&D alliances (Q#1G1), and purchaser- supplier agreements (Q#1I1) tend to be formed more often with larger businesses. Outside contracting (Q#1J1) is the only alliance type more often established with similar/smaller-sized partners.
Resource dependency theories suggesting smaller firms lack of resources have often been offered to explain the reason small businesses form alliances. The responses to this survey suggest that for most of the types of alliances mentioned above, small businesses are as often the source of resources as the seeker of resources. The type of alliance does however have an impact for certain types of alliances (licensing, franchises, R&D, and purchaser/supplier alliances) showing that small manufacturers for these types seek out larger businesses with the requisite resources as partners. The tendency for “larger” small firms (over 20 employees) to work with other small or similar-sized firms is evidenced in the other types of alliances.
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Specific Alliance Experience
Sixty-four (64) percent of the small manufacturers report either currently or previously holding an alliance relationship (53% of those with less than 10 employees, 64% with between 10 and 19 employees and 71% with 20 or more employees). Sixty-three (63) percent of the small-business owners report current or prior alliance relationships. Twenty-four (24) percent of manufacturers report having formed their first alliance in the past four years (Q#3), but over 35 percent report forming their first alliance over 10 years ago. The type of alliance most often formed first by small manufacturers is a production alliance while the first type of alliance formed by small-business owners is most often a marketing alliance (Q#4). The least likely first alliance to be formed by the small manufacturers is a franchise, process-based R&D or service-based alliance. The least likely first alliance to be formed by a small-business owner is an export/import trading alliance.
Thus far, the responses provided by the business owners and managers relate to their alliance experience in general. In order to provide a better understanding about the specifics of some of their alliance relationships, those owners with alliances were asked to provide information about a specific alliance relationship. They were to report on the oldest alliance still in existence, but only if it was at least one year old. The one-year time limit was included because a number of the questions related to operational experience would not be relevant for very new alliances. Thirty-eight (38) percent of small manufacturers and 35 percent of small businesses have an alliance that meets these criteria.
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a. History of the Alliance
Seventy-four (74) percent of the specific alliances that the small manufacturers discuss are relatively new having been formed since 2000 (Q#6). Just over 20 percent were formed prior to 2000. There are wide ranges of alliances described, but as was the case with the manufacturers general alliance experience, the most reported type of alliance is the production agreement (Q#7). The most common type for small businesses is the marketing agreement.
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b. Alliance Partners
Survey results indicate alliance partnerships often evolve out of prior social relationships. More than 36 percent of the small manufacturers and 40 percent of the small-business owners report a social relationship existing prior to forming the alliance (Q#10). More than 25 percent of the small manufacturers had held a prior alliance with the current alliance partner (Q#10a). Over 47 percent of small manufacturers and 50 percent of small-business owners had known their alliance partner in excess of five years, while almost 7 percent of both business groups knew their alliance partners for over 20 years (Q#10b). These results suggest that the majority of alliances formed among small businesses are formed with partners with whom owners and managers have had either prior social or business relationships. Many of these relationships existed for a number of years prior to alliance formation. Forming alliances based on prior experience is often attributed to trust related issues and the potential for opportunistic behavior. The results of this survey seem to support that view.
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c. Equity Involvement
Small-business owners often appear to form alliances as a “life-line.” Respondents were asked if either they or their alliance partner had made equity investments in the alliance. Manufacturers report very similar rates for both themselves and their alliance partners. Twenty-three (23) percent made equity investments in the alliance or partner business (Q#8) and 26 percent of the partners had equity investments in either the alliance or the respondent’s business (Q#9). As the manufacturers grow in size, the percentage of alliances in which both they and their alliance partners make equity investments tends to grow.
The story is similar for small businesses. The rate of equity contributions on the part of the respondent’s business (15% had made equity investments) was 8 percentage points less than the rate at which they had received equity investments from alliance partners. Twenty-one (21) percent had partners who made equity investments in either the alliance or the respondent’s business.
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d. Resource Commitments
Although a number of owners and managers report making equity investments in the alliances or partner businesses in general, the levels of non-recoverable investments tend to be small. Sixty-eight (68) percent of small manufacturers and 75 percent of small-business owners report that their levels of non-recoverable investments are either small or very small (Q#11). Just over 15 percent of small manufacturers and 11 percent of small-business owners say that the level of non-recoverable investments is either large or very large. Obviously, the level of investment required would vary both with the type and age of the alliance. It appears that both groups typically take a relatively low-risk approach to alliances as it relates to non-recoverable investments.
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e. Experience
Small-business owners and managers were asked a number of questions relating to the quality of their experience with the alliance. Their responses regarding the quality of their alliance experience are somewhat surprising given anecdotal accounts of alliance failure rates. The results of the survey may be somewhat skewed given that the owners and managers were asked about their oldest continuing alliance (at least one year old). The fact that the alliance had existed for at least a year indicates some level of success to begin with and excludes alliances that had failed relatively quickly. An alliance several years old is presumably even more successful than one just one or two years old.
More than 84 percent of the small manufacturers indicate that their experience with their oldest continuing alliance has been either good or very good (Q#12). Just over 76 percent report positive experiences in small businesses. Only 4 percent of the small manufacturers and about 4 percent of the small-business owners report bad experiences with their alliances. Almost 78 percent of small manufacturers report profitable alliance relationships and 63 percent of small-business owners also report positive financial returns (Q#13). Less than 6 percent of small manufacturers and 2 percent of small-business owners report unprofitable alliances. Notably, smaller percentages cite bad experiences than those that cite poor financial results. This suggests that the primary goals of the alliances in some cases are not necessarily financial in nature.
Sixty-four (64) percent of small manufacturers say that the alliance met expectations and 19 percent say that the alliance exceeded expectations (Q#14). Small-business owners indicated that alliances had met expectations almost 58 percent of the time and almost 30 percent of alliances had exceeded expectations. About 17 percent of the alliances for both business types had not met expectations.
Over 71 percent of the small manufacturers and 84 percent of the small-business owners report that their alliances had improved their ability to compete, with more than 36 percent of both groups reporting that their alliances had provided much improvement in their ability to compete (Q#15). Twenty-seven (27) percent of the former and 9 percent of the latter say that their alliance has done little to improve their competitive ability. Almost 6 percent of the small-business owners indicate that their alliances had actually hurt their ability to compete. This number was negligible for manufacturers.
The experience with the oldest continuing alliance and other alliances businesses currently hold or previously held are typically similar. About 56 percent of small manufacturers and 40 percent of small-business owners believe that the two experiences are alike (Q#16). However, over 27 percent of the former and 32 percent of the latter indicate that their experience with the older alliance was better compared to others. The reverse was true for about 8 percent of small manufacturers and 13 percent of the small-business owners.
Alliance experiences do tend to be somewhat different given the size of the business. Very small manufacturers (less than 10 employees) tend to have slightly higher percentages of businesses with alliances that fail to meet owner expectations or to provide financial returns. Additionally, a slightly higher percentage of this sized manufacturer tends to report that the alliances have not changed their ability to compete. The final result however is that significant numbers of both small manufacturers and small-business owners report that their alliances met their expectations, provided positive financial returns and improved their competitive ability. These results indicate that taking the time to investigate alliance opportunities may have a positive impact on businesses of all types and sizes.
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f. Expectations for the Alliance
Respondents were generally optimistic about future financial returns for the alliance. About 57 percent of small manufacturers and 52 percent of small-business owners believe that financial returns from the alliance will improve (Q#13a). Fewer than 6 percent of the former and 13 percent of the latter believe that financial returns are likely to fall. The remainder either expected no change from current returns or did not know. Notably, the most optimistic group is small manufacturers with less than 10 employees. More than 61 percent of them believe that financial returns will get better.
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Final Comments
Approximately 64 percent of surveyed small manufacturers and 63 percent of surveyed small-business owners report that they currently have or have had in the past at least one alliance relationship. Small businesses that have alliances tend to have both multiple alliances and multiple types of alliances. Alliance formation does appear to be linked to resource capabilities, since the number owners and managers reporting alliances grows with the size of their businesses. Smaller businesses tend to form most types of alliances with larger businesses at approximately the same rate as larger businesses form alliances with similar/smaller-sized businesses. However, there are exceptions. Licensing agreements, franchise agreements, product or service-based R&D alliances and purchaser-supplier alliances tend to be formed more often with larger partners. While some small businesses are relatively new to the alliance process, more than 35 percent have maintained alliances for over 10 years.
Alliance partners are most often drawn from prior social or business relationships and have been known to the respondents for more than five years. It does not appear that in general small manufacturers form alliances as “life lines” since they tend to make equity investments in the alliances as often as their partners make equity investments. The rate of investment by small-business owners, in contrast, tends to be significantly higher than the rate of investment by alliance partners. On the other hand, neither group tends to structure alliances in such a way that the levels of non-recoverable investments are high.
The small manufacturers and small-business owners surveyed tend to be very pleased with their alliance experiences. A significant percentage indicates that their alliance experience has been good with positive financial returns, improved abilities to compete, and expectations met. The result is that alliances appear to offer smaller firms substantial potential as a means to expand the business with relatively little financial investment.