United we stand

Entrepreneur, April, 1998 by Heather Page

No man is an island. No business is an island, either. No matter how large or small, every company is just one tiny piece of the complex puzzle that makes up the business environment of the '90s. In reality, few companies are shaping their industries by generating all the innovations alone. Rather than ignoring what others are doing in the marketplace, many believe that success in today's competitive business world demands a keen sense of other companies' actions and how those activities shape, enhance and even benefit their own businesses.

Consequently, more and more companies are finding it advantageous - even necessary - to form strategic alliances. Businesses are forging partnerships in record numbers to develop products, share resources and pool expertise. The typically temporary nature of alliances makes them even more palatable to entrepreneurs. Partnerships foster mutual benefits, but unlike a merger, ownership remains with the respective parties - and the alliance exists only as long as it's advantageous to both.

Among the most notable recent pairings is the alliance Microsoft formed with longtime rival Apple Computer, sending shockwaves through the computer industry. While alliances are commonplace in the hardware and software fields, they've also become prevalent in other industries - from communications to retail to manufacturing.

According to a recent Coopers & Lybrand LLP study, among America's fastest-growing companies, 48 percent more alliances exist today than three years ago. The number of alliances per company is also increasing. Of the firms surveyed, 61 percent are participating in an average of four strategic alliances, compared with 55 percent involved in an average of three alliances in 1993.

The fast pace of many industries, shrinking product cycles and changing technology are driving this trend. "The [motivation for] most alliances today is that markets [don't have] the patience to wait for internal growth," contends Robert Paglia, a partner at Coopers & Lybrand.

Alliances are particularly alluring to small businesses because they provide the tools businesses need to be competitive. "For some small companies, alliances are a matter of survival," says Robert E. Spekman, professor of business administration at the Darden School of Business at the University of Virginia in Charlottesville. "It's becoming too complicated and expensive to develop expertise, and market access is becoming much too hard to come by."

MUTUAL BENEFITS

More often than not, today's alliances are created to increase market penetration for a company's product or service. In fact, according to the Coopers and Lybrand survey, 54 percent of firms that formed alliances did so for joint marketing and promotional purposes.

For small companies, pairing up with a large company that has mass appeal and vast marketing resources opens up a world of possibilities. Clotee McAfee and Ruby Eddie, co-owners of Uniformity LLC, a Los Angeles manufacturer of fashionable high school uniforms, knew they had an innovative product - but they weren't too naive to realize they lacked the marketing clout to make a real impact.

"We knew we didn't have a Calvin Klein budget, but we needed to market [our uniforms] that way to accomplish what we wanted," says McAfee, 43. "We had to get our name in front of a lot of kids for [our product] to be accepted."

In October 1996, McAfee wrote to Macy's West, telling the department store chain about the product, how she and her partner wanted to market it, and why an alliance would benefit both companies. Macy's responded with strong interest, not yet having entered the clothing market for public school uniforms. A year later, Uniformity's clothing line debuted in Macy's Baldwin Hills, California, store, with plans to expand to another 10 locations on the West Coast. What's more, Macy's put its marketing clout to use for Uniformity by issuing a press release for the grand opening of the new in-store boutique. The two companies plan to participate in several more joint marketing campaigns later this year.

Alliances also make sense for high-tech firms such as Liquid Audio, a Redwood City, California, company that develops software for distributing music over the Internet. Since it was founded in January 1996, Liquid Audio has created more than 20 alliances with small and large companies, primarily for the purposes of joint marketing and product development.

"Alliances are important to us because we must stay focused on our core opportunity," says Robert Flynn, 43, co-founder of Liquid Audio with Gerry Kearby, 50, and Phil Wiser, 31. "We have limited resources, so if something isn't essential, we don't want to spend our time and money developing it," says Flynn.

Instead, Liquid Audio has turned to its many partners to expand its horizons. Alliances with record labels such as Capitol Records, BMG Entertainment and EMI Records Canada have given the company the necessary music content for consumers to download. Meanwhile, alliances with technology partners such as Microsoft, which brings its audio streaming technology to the table, have added value to Liquid Audio's offering.