Although strategic alliances are an increasingly popular way for entrepreneurial firms to accelerate growth, they should be approached strategically and carefully. A failed alliance can cause a firm to lose money and can be very time consuming and frustrating to exit from. Alliances are often compared to marriages and other close relationships: easy to get into but very hard to get out of—at least gracefully.
There are three key steps in setting up and executing a successful alliance relationship. The following are the three steps, along with words of advice on how to handle each one.
Selecting a Partner Any company or group of companies that has something a firm needs is a potential alliance partner. For example, small food companies often partner with large food companies to gain access to their distribution channels.
But a company should remember that a potential partner is looking for a leg up too in the form of some type of advantage while competing in the marketplace. If the small food company has to give the large food company “exclusive” distribution rights to its best products to get the deal, it may not be worth it. Entering into an alliance should improve a company’s situation—it’s shouldn’t be a jump ball. Alliances take a great deal of effort to manage and certainly to manage successfully. If each company in an alliance breaks even in terms of outcomes, the alliance is not usually worth it, because of the time and effort it takes from other activities.
Also, a firm should always investigate the reputation of the companies it is thinking about partnering with.
Asking for references of other businesses the company is partnering with is appropriate, even if the company is well known. If a company is reluctant or unwilling to provide references, look elsewhere.
According to Guy Kawasaki, a respected Silicon Valley entrepreneur and venture capitalist, most companies form alliances for the wrong reason: to make the press and analysts happy. Kawasaki says this is foolish.
Alliances should be formed for one of two reasons in Kawasaki’s opinion: to either increase revenues or decrease costs.

Cutting the Deal
Negotiating an alliance can take multiple meetings, conference calls, and e-mail messages. So it’s best to cut to the chase, as early as possible, to discern if a deal is possible. It’s easy for a small firm to get sucked into months of negotiations with a large company like Microsoft or Google, only to have the deal fall through. It probably won’t hurt Microsoft or Google if a handful of its employees lose time failing to negotiate an alliance agreement with a small firm. The lost time on the part of the small firm may be much more damaging.
The most important consideration in cutting a deal is to make sure the potential partners truly have synergies (i.e., 2 + 2 = 5), and that the synergies are sustainable.
Otherwise, experts agree, “no contract will hold them together.” Also, firms should be leery of entering into an alliance if there is any hint that the people who will actually implement the alliance aren’t totally on board. The worstcase scenario is two CEOs who meet at a conference and start talking about their two firms “working together.” If they start kicking around alliance ideas that don’t make sense, the midlevel people in an organization need to be empowered to hold their ground. The people who have to implement the alliance, for both organizations, should be heard. If they’re less than enthused about an alliance proposal, it should be scrapped.
If an alliance agreement is struck, it should be accompanied by a set of operating principles that guide its day-to-day operation. It’s also smart to include an “out” clause, which allows each party in the alliance to terminate its involvement relatively easily.
Making It Work
The biggest obstacle to making an alliance work is that the corporate cultures of organizations often vary in substantially important ways. As a result, the first thing that should be determined when deciding how to manage an alliance is how decisions are made. A start-up may be use to making decisions on the fly, while a large company partner may route decisions through several committees before a final decision is made. Unless the partners know what to expect, frustrations can result.
Each alliance partner should also appoint an internal “champion” who has direct responsibility for the alliance’s health and progress. “A bunch of people helping out when they can” doesn’t cut it. An alliance should have a boss inside each involved organization, just like employees have bosses.
The individuals who will make the alliance work for all the parties involved should also meet face to face. It’s normally easier for people to trust one another and work together across distances if they’ve met at least one time and have had an opportunity to get to know one another as individuals.

Questions for Critical Thinking
1. In what ways is it easy for the founder of a firm to get caught up in the potential advantages of participating in alliances without remaining equally focused on the potential disadvantages?
2. Think about the partnership arrangements you’ve been involved with, even if your experience has been limited to working with other students in team settings in classes. What are some of the challenges in making alliances work that are not mentioned in the feature?
3. Do some Internet research and find an example of an alliance between a small firm and a large firm that seems to be working well. Briefly describe the nature of the alliance and explain its success.
4. The “You Be the VC 14.1” feature focuses on Cityscape Farms, a start-up that’s creating urban greenhouse systems for year-round production of sustainable local fresh foods. Brainstorm three to five likely alliance partners for Cityscape Farms. Explain how each partner can help Cityscape either increase its revenue or decrease its costs.

Transcribed Image Text:

YOU BE THE VC 14.1 Company: Cityscape Farms Web: www.cityscapefarms.com Twitter: Cityscape Farms Facebook: Cityscape Farms Business Idea: Create urban greenhouse systems for year-round production of sustainable and local fresh food. Pitch: Food travels 1,500 miles on average in the United States to get to consumers. At the same time, global demand for food is increasing. By 2050, the earth's population will grow to nine billion people (compared to roughly seven billion today). That steep increase in population requires the development of new methods of farming in order to feed our planet's inhabitants. Concurrently, traditional methods of farming, which rely largely on petroleum to fuel farm vehicles and for fertilizers and pesticides, are coming under increased scrutiny. Petroleum is a nonrenewable resource. In addition, a growing number of people prefer organic food, which is largely grown without the use of petroleum-based chemicals. Modern agriculture also uses 70 percent of the world's fresh water withdrawals, is the largest source of water pollution, and is the largest consumer of land. Cityscape Farms offers an alternative. Instead of focus- ing on the countryside, where food must be trucked to processers and ultimately consumers, the company is focused on cities, and is building greenhouses on rooftops and in vacant lots. Cityscape's approach utilizes aquaponics, which is a combination of aqua- culture (fish cultivation) and hydroponics (soil-less farming), where fish and plants are grown in a symbiotic system. Each greenhouse includes a fish tank. Water from the tank, which is enriched by the fish waste, flows through a filter and a pump, and is then distributed into growing trays, where fruits and vegetables are grown. The water