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Forming an alliance: an Operative Guide to Small and Medium Size Businesses

In my last post, I explained what motivates businesses to form an alliance. I also discussed briefly about the key elements businesses should focus on in order to form a successful partnership. In this post I will introduce a conceptual framework for forming a successful alliance between small and medium size enterprises.

Up until now, when trying to explain the different determinants of alliance success or failure, the literature focused on identifying specific cause-effect relationships from a particular theoretical stand point. A five phase conceptual framework, developed by two Austrian scholars, Hoffmann & Scholosser, is different and innovative because unlike the others, it doesn’t limit itself to one theoretical view.

Actually, four different alliance formation theories stand at the base of this conceptual framework: the transaction-cost theory recommends minimizing the sum of fixed and continual transaction costs. It suggests that in the case of small and medium size enterprises, alliances are the most transection-cost-efficient organizational form. The resource-based theory views the company as a bundle of resource and proposes that alliances should be considered when a company is in need of more resources but do not have the means to buy them. According to the knowledge-based theory, alliances provide businesses the best context to share and combine knowledge, improve learning processes and shape the environment they are active in. Along with these economic-based theories, sociological approaches view alliances as a way to enhance companies’ legitimacy and create interpersonal and inter-organizational trust.

All four theoretical perspectives converge into the framework. The factors influencing alliance success in the five stages of alliance formations are all established on the ideas of these theories. The economic-based theories influence the content of the alliance and concentrate on measures that have to be implemented in strategy, structure or system (The “what”). Sociological approaches refer to the process of developing inter-organizational relationship needed for the formation of a successful partnership (The “how”).

Here are the 5 phases:

Phase 1: Strategic analysis and decision to co-operate: The writers suggest that the best business environment for an alliance is high need for strategic flexibility and limited need for control. They state that companies should carefully examine if the alliance serves their strategic objective, but be patient and realize that it may take years until the alliance achieve them.

Phase 2: Search for a partner and partner selection: First and foremost, establishing a trust based relationship is crucial to the potential expansion of the co-operation .Also in line with transection based theory, trust between the two partner can help them save money on developing and implementing control processes. Other considerations are choosing a partner, who is excellent in his field and has complementary resources. Last but not least, the two partnering companies should make sure their organizational cultures fit and work well with each other.

Phase 3: Designing the partnership: In order to minimize the need for control mechanisms, the duties and rights of each partner should be clearly defined and the contribution off each of them should be equal. Also, partners need to agree on realistic objectives and create an implementing plan with set milestones.

Phase 4: Implementation and management of the partnership: After the decision to partner is taken, the members need to establish an information and co-ordination system that should be supported and pushed by top management. Also, once the partnership agreement is signed, the two companies should start working together right away so they can get used to it and see the alliance become a reality. Both partners should provide the required resources but also avoid unwanted transfer of knowledge.

Phase 5: Termination of the partnership: Almost all partnerships end eventually. The prerequisites and terms of a possible alliance termination should be defined in the design phase. Also, all partners should be treated respectfully and completely informed about a possible termination, so future relations wouldn’t damage.

Based on: Hoffmann W.H., & Schlosser R. (2001) Success factors of strategic alliances in small and medium enterprises-An empirical survey. Long Range Planning, 34, 357-381

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