Forging foreign alliances
At some point in time each SME is constrained by limited financial and human resources. One solution is to look for a low cost and resource light entry into a foreign market, says Dr. Ashraf Mahate, Head of Export Market Intelligence and Dubai Exports, and Vice Chair of the Economic Policy Committee, Dubai Economic Department.
SMEs are at times expected to service their clients to a level that is comparable to large companies and face the competition from new players in their own market. Some of these new companies competing within your market tend to be foreign owned entities that are expanding their geographical base. SMEs faced with this situation theoretically have two choices; namely to carry on as they have been focusing on the domestic market, or, to diversify their own market base. The former option is time dependent in that slowly the firm’s own market share will decline and perhaps come to an end.
The latter option is obviously the preferred one but it is not always followed due to availability of financial and human resources. The real question is how long can SMEs ignore entry into foreign markets, especially if sales growth in their own market is limited and their own share is being eroded?
Essentially strategic partnerships, or sometimes referred to as an alliances, is a long-term arrangement between two or more companies to position either an existing or new product or service in a defined geographical area.
In doing so it is intended that at least one party in the relationship is able to reduce its costs. Although, cost minimisation is important it is not the only defining factor in a partnership and equally important is the objective of long-term value growth. In other words, the aim of the partnership is for the firms to come together in order to capitalise on their relative strengths.
Types of strategic alliances or partnerships
The term strategic partnership or alliance incorporates a number of different structures some of which are listed below:
Joint ventures: A joint venture is a partnership between the exporting firm and the importing firm, negotiated to involve one or more of the following, equity, transfer of technology, investment, production and marketing. The partnership contract will define responsibilities for performance, accountability, profit sharing, and marketing arrangements.
Joint ventures can spread costs, mitigate risks, offer knowledge and details of local market, and ease market entry. Individual countries may have laws which regulate joint ventures.
Licensing or franchising: A firm can contractually assign the rights to certain technological know-how, design, and intellectual property to a foreign company in return for royalties, or some kind of payment. Licensing offers rapid entry into a foreign market.
Capital investment is allowed, and the return is usually realised at the earliest, but licensing involves loss of control over production and marketing, and the inevitable sharing of technological know-how by the licensee, unless carefully prescribed in a legal contract. Software rights, branded name rights in hospitality sector and so on are examples of the same.
Joint equity strategic alliance: is where two or more companies come together through equity participation in order to form a totally new firm. Although cash based equity can be one type of input it need not always be the case. In other words, some of the partners can actually contribute tried and tested research, other resources such as facilities or human capital or it can even be sweat equity.
The aim of such a partnership is to create long term sustainable competitive advantage through each party being able to contribute what it is best at as well as being able to incorporate partners who are cash rich but lack opportunities. For SMEs this type of partnership offers considerable benefits because they do not necessary have to participate in the day to day management of the operation and their contribution can be limited based on their resources and level of commitment.
Non-equity based strategic alliance: this is whereby two or more companies come together in order to share some resource or capabilities so as to create a competitive advantage. This type of relationship need not be long term it can be for a fixed time period.
A typical example is where Company A may want to use Company B’s warehouse and distribution network in a foreign country for a certain time period. This gives Company A the ability to penetrate the foreign market without incurring additional investment in warehousing, distribution network, sales staff and so on. In return Company A will offer either the same or different service. The key advantage of such a relationship is that it allows the SME to test a relationship before making it long term.
How to find strategic partners
Forming strategic alliances is not an easy task, however, SMEs can identify an appropriate foreign partner in the following ways:
Trade journals: Often, firms place advertisements in trade journals or a listing in a trade directory. Although these advertisements or listings are unqualified in other words the firm has not been verified it nevertheless gives the exporter an idea of the number and type of firms operating in the market. The second stage is for the exporter to carry out its own due diligence.
Participate in catalogue and video exhibitions: Catalogue and video exhibitions are another low-cost means of advertising export products abroad. In this way, the export products are introduced to potential partners at major international trade exhibitions. Usually, the embassies show export products catalogues and videos to interested agents, distributors and potential buyers.
Exhibit at trade shows: International trade shows are an excellent way of marketing an export product abroad and to locate foreign representatives.
Participate in trade missions: Participating in foreign trade missions is another way to meet foreign representatives. Public and private trade missions are often organised by governments and trade associations. Arrangements are handled by the organising party so that the process of meeting prospective foreign representatives is simplified.
Business to business (B2B): This is an electronic market place where exporters and foreign representatives can meet and transact business. The B2B exchange is effective in reducing search cost as well as the provision of information to a large number of potential partners.
One of the most important decisions that an exporter needs to make is to select an appropriate partner. Selecting the correct foreign partner can ensure that the exporter’s products are successful in the target market. On the other hand the wrong foreign partner can lead to not only a disastrous entry into the target market but wasted management time and resources. Exporters can minimise the risks of finding a foreign representative through ensuring the following aspects:
– A proven track record or experience in the product in question for the target market;
– An extensive geographical coverage with a supporting infrastructure;
– An established player in the market with key advantages over its competitors;
– Experienced sales team that is well managed with appropriate financial and non-financial incentives;
– Ability to provide the exporter with appropriate market information;
– Have adequate warehousing, servicing and after sales ;
Although the above aspects cover the essential qualities that a foreign partner needs to have, it is important to bear in mind that there are also other human factors that need to be considered. For example, the exporter and the foreign representative need to have a strong and positive relationship that is built on trust and transparency.
The normal procedure in selecting a foreign partner is to first to identify at least five or six potential partners. The second stage usually involves the exporter meeting the key personnel of the foreign partner. This stage allows the SME to discuss its own strategic direction and corporate practices with that of the foreign partner.
This will allow the SME to assess if the two entities share the same corporate goals. In doing so the SME will also be able to evaluate the business and non-business aspects of the key personnel in the foreign entity and evaluate whether its own team will be able to work together. The third stage can be a formal due diligence of the foreign which can cover the various aspects including the following:
– Sound financial position with a good reputation for prompt payment;
– Ownership structure;
– HR issues;
– Trade membership;
– Ability to deliver a quality service and after sales support;
– Ability to adequately market the product or service;
– Legal issues.
Once the due diligence has been carried out the SME needs to decide which type of partnership to form. There is no golden rule to this and it really depends on the current market situation, the benefits that each partner is able to make available and the long term goals of each party.
Then there are also legal aspects that have to be considered before forming a partnership. Most countries have specialised legislation covering the rights and obligations of all parties in a partnership agreement. Therefore, before any formal agreement is entered into, the SME needs to seek legal advice.
Although, alliances or partnerships are a slow entry mechanism because of the steps involved in their formation, they do, however, offer a viable alternative for SMEs not wishing to go alone in a foreign market. The world of commerce is full of success stories where alliances have made a real difference to SMEs. However, this success does come with a word of caution in that they have to be very careful as to whom they select and what is agreed.
Dr. Ashraf Mahate is the Head of Export Market Intelligence at Dubai Exports (formerly known as the Dubai Export Development Corporation), which is an agency of the Dubai Economic Department. Dr. Mahate is also the Vice Chair of the Economic Policy Committee with the Dubai Economic Department. He has written a number of journal articles, chapters in books and edited books in the areas of economics, finance and banking. He has also presented papers at major international conferences. Dr. Mahate has provided extensive consultancy services to various organisations in the areas of banking, economics and finance. He has been a director of a number of companies including a venture capital company and a private equity fund.
Dr. Mahate received his doctorate from Cass City University Business School in London (UK) which was ranked by the Financial Times newspaper as the 12th best university in the world for finance. He read Economics at University College London, followed by a Masters in International Economics and Banking at the University of Wales in Cardiff. Dr. Mahate is a professional educator and received his training at the Institute of Education (University of London). He is a member of the Chartered Institute of Managers (UK) and a Member of the Institute of Commercial Management (UK). He is also a member of the Association of Certified Anti-Money Laundering Specialists (ACAMS).