Types of Business Partnerships

A Mutually Beneficial Business Option

In today’s global market, there are good reasons for two companies that share the same retail market to work with one another, forming a strategic partnership. Technology and mass production are two major factors that may result in the development of a strategic partnership between two parties. The ability to pool resources and reduce cost for each entity involved, lead many companies into this mutually beneficial business option. Goals can be reached that each party would not be able to achieve on their own.

A strategic partnership should not be confused with joint ventures. In joint ventures, two separate companies come together to form a single entity. A lot of decisions are made by both companies in a joint venture, but the parent company often has the final word concerning major activities of the newly formed entity. A strategic partnership is less permanent than a joint venture. In a strategic partnership, each party retains the right to make decisions about their own companies while teaming up with the other entity.

Mergers occur when one company takes over the assets of the other. Integration must take place at a rapid pace to experience success in a short time frame. A strategic partnership will allow for a test period of some companies before proceeding with any further significant business.

There are a variety of commercial ventures that rely on strategic alliances models. Most are described by one of these two characteristics when formed.

CONTRACTUAL – These are usually short term contracts. An official description of management hierarchy is not needed. Some examples include turnkey projects, outsourcing, licensing and franchising.

EQUITY– This arrangement involves one entity paying for shares in exchange for a certain amount of equity in the other company.

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Below are some common strategic partnership models that can either be contractual or equity

1. Using Suppliers

Forming a business partnership with suppliers benefits the retail entity by increasing the likelihood of having products on hand when they are needed. An example is an amusement park that allows a cola manufacturer to sell soft drinks directly on the park grounds. The park establishment does not have to deal with waiting for supplies, and the cola company has instant access to customers. WalMart shelves Bristol Myers products. When a large amount of Bristol Myers products are sold, the Bristol Myers rep at WalMart will inform the manufacturer, and have the WalMart shelves restocked within 24 hours. Wait time is reduced, and less sales are lost, as compared to other stores who may have to wait on back orders.

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2. Outsourcing

This model rose to prominence in the 1980’s and continues today. The thought is that remote labor would reduce costs for consumers. Although, sometimes frustrations arise depending on outsource locations. Will the external employees have sufficient knowledge of the product or process being sold so that they can keep domestic customers satisfied?

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3. Employees

Using staff may not appear to be a wise decision at first glance. However, business owners/managers should not overlook the potential benefits of having “field” personnel establish rapport with the customers. A company may choose the option of giving stock options and bonuses as incentives. Employees will feel a greater sense of ownership in the company, providing for a higher quality sales/work force.

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4. Technology Licenses

In this arrangement, intellectual property and trademarks are licensed to another entity. This allows companies to enter into foreign markets at a lower cost. Keep in mind, though, that licensing has risks as the parent company has little control, and products can be exploited at their expense.

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5. Franchising

This popular business model is a convenient way for companies to go national with their concepts. The parent company has small risk as franchise buyers pay the setup fees. Risks are inherent with these commercial ventures, as there is little control of how the franchisee will run the business.

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6. Competitors

A company may be enticed to view a competitor as a potential partner if the end reward is lucrative. If two rival companies combined their resources, megaprojects can be undertaken without either entity losing money. The movie “Titanic” was made when Paramount Pictures joined with 20th Century Fox. The hefty receipts from the boxoffice allowed both entities to enjoy the fruits of their partnership. MCI and AT&T have also joined together to better serve their customers, and even lobby together for new legislation.

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7. Distribution

This alliance is very common for companies thinking of ways to solicit more customers. Commercial ventures of this type may result in cross-promotion agreements. Banks may partner with insurance companies by allowing promotions to be included in monthly bank statement mailings. The insurance company gets exposure to more customers. Banks offer a greater value to their customers.

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8. Product Licensing

The arrangement is similar to technology licensing. However, the license is only for manufacturing and selling, usually limited to specific geographical areas. Companies can expand at a lower risk, rather than building from a manufacturing base. Whether dealing with tangible goods like food, or intangible products, such as intellectual property, it is not always easy for a business to determine if a strategic alliance is a good fit. There are a number of factors to investigate with the potential business alliance partner, such as financial risk, market presence, the quality of service and a passion for satisfying their clientele. However, if the arrangement seems to be a good model, many forms of strategic partnerships will help businesses gain a competitive advantage.

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