This Article is written by Mehak Jain who is currently pursuing law at the Hidayatullah National Law University. This is an exhaustive article that aims to explain Strategic Partnership and its types.
Table of Contents
Introduction
Strategic partnerships are the ones entered into based on the sharing of resources by two separate business entities to pursue a common aim. The target to achieve is that the customer benefits, while your own costs are lowered. It benefits both small as well as large businesses alike and is increasingly being adopted to ensure maximum gain.
Strategic partnership agreements are entered into between partners to set into stone the terms and conditions of the partnership. There are 5 types of strategic partnerships most commonly seen which include:
- Strategic Marketing Partnerships,
- Strategic Supply Chain Partnership,
- Strategic Integration Partnerships,
- Strategic Technology Partnerships, and
- Strategic Financial Partnerships.
If fulfilled correctly and with transparency, these agreements are the foremost way of satisfying all- the parties involved as well as the customer.
Strategic Partnership
In a strategic partnership, two non-competing enterprises with a common mission enter into a complementary relationship based on mutual benefit. Both agree to pool their resources to reach an end product that is profitable to both.
For example, the collaboration of H&M and designers such as Moschino. With this collaboration, Moschino as a designer gained exposure from a well-known chain like H&M thus becoming a well-known name. On the other hand, H&M got distinctive and fresh designs from a designer who is known for its luxury brand.
The underlying principle for a strategic partnership is a mutual benefit- How can I minimize my costs while not compromising on quality? It can almost be equated with a barter system of sorts, where both entities reciprocate and add more quality to the final product with each other’s help.
Oftentimes, there are limits to what a business entity can pursue. Maybe it lacks the technological equipment or capability, or maybe it lacks confidence. In such cases, strategic partnerships rush to the rescue to provide things unavailable in-house. It’s a system of give and take which aims to promote growth for all partners.
Another example can be the presence of Starbucks outlets inside bookstores such as Barnes and Noble. What this does is that it made the product more available and raised brand profiles of both. A strategic partnership which if done right has only gains with minimal losses.
5 Steps to ensure a frictionless, satisfactory strategic partnership
- Identify your goals: It’s essential that you’re crystal clear about what your goals are. Do you want to access a new market or do you want to seek more technical help? Is your goal long-term or short-term? Knowing your goals will make identifying potential partners easy and will ensure that you remain on the right track.
- Distinguish potential partners: The most important part is that he/she should not only satisfy your expectations but also have the same business values and strategy relevant to both firms.
- Do a fact-check on them: Fulfil your due diligence. Look them up and answer questions such as how strong the brand with whom you’re looking to partner up is, how is their reputation in the market, etc.
- Make a proposal they just can’t refuse: Make your first proposal a win-win situation so that it benefits both parties.
- Negotiate around: Be clear about your limits and have everything written down so that no dispute in the future arises.
Strategic Partnership Agreements
The next step after finding a strategic partner is to have everything written down in the form of an agreement and crystallized. This is a strategic partnership agreement. It is entered to dismiss the future probability of a disagreement arising between the parties. A proposal is made and signed so that no doubts of who does what later arise.
A proper strategic partnership should include the following:
- The parties involved in the agreement;
- The services to be performed by each party
- The terms of the agreement such as percentages of profit, method of billing, etc.;
- Details of the reporting structure, person of contact, etc.;
- The duration of the agreement;
- The signatures of company officers or their designees.
Types of Strategic Partnership Agreements
Strategic marketing partnerships
This type is commonly seen in automobile industries. The underlying principle is that one company is responsible for making the product, and the other is responsible for selling, with an aim of tapping into an entirely new market. For example, a pharmaceutical company enters into a partnership with a delivery company. In this case, the pharmaceutical company will focus on manufacturing the drugs whereas the delivery company will take up the job of delivering it to their clientele.
Another example can be that of the e-shopping websites such as Shein and Myntra typing up with delivery services such as Delhivery. The former provides a mode for the customer to shop and the latter ensures efficient delivery and tackles its area of expertise. Here, both the brands benefit from each other- Shein gets a delivery service that is speedy and makes it get good customer reviews in terms of delivery, and Delhivery gains brand image and exposure by tying up with a brand as known as Shein.
Strategic supply chain partnerships
Most commonly seen in the film industry, this type of partnership has now become almost essential to produce any movie. A small production house ties up with a bigger production house and they both share their resources to get the final optimum product, which is their movie. The former is tasked with filming and post-production activities while the bigger production house manages the set, camera, lights, etc.
The technology sector also sees this type of partnership. One firm is responsible for making components for another firm- and hence, the second firm gains its components and the first gains a brand image, exposure, and legitimacy. We can take Intel as an example. Intel is responsible for preprocessor chips for other companies. The latter benefits by gaining trusty material and Intel maintains its image and reliability as a brand.
If you can reduce costs yourself, a partnership isn’t required. However, if not, and you want to cut costs without sacrificing quality- this for you.
However, problems may also arise as the need to satisfy the customer in the end in terms of cost and quality; but you can’t sacrifice the individual sector’s profitability either. You need to learn to strike a difference between the two and if the partnership works in your favour, only then go for it.
Strategic integration partnerships
This type consists of agreements between hardware and software manufacturers, or software and software manufacturers. Let’s take the example of Oyo Rooms. It collaborates with various hotels and guest rooms to provide affordable stay. The hotels and guesthouses have a lot to gain from this venture as they get authenticity by associating with a known brand, they gain credibility, increase their chances of gaining customers and so on while Oyo increases its database to be more customer-friendly.
Another classic example is that of Uber and Spotify. The customer gets a pleasurable ride, Uber gains prevalence as more people will opt for it than its other competitors, and Spotify gets more known and used by associating with such a brand. It is a win-win situation for each party connected.
Strategic technology partnerships
Another type of alliance is a strategic technology partnership. This type of strategic partnership involves working with IT companies. This can be a partnership between your web design firm and a specific computer repair service that you always call in exchange for a discounted rate on services. Basically, any kind of technological expertise that is necessary for your business that you cannot provide in-house can be relegated to a strategic technology partnership.
Strategic financial partnerships
Agreements between companies where one company is responsible for looking into the finance aspect of the other company solely, and gains its revenue as well as reputation in return forms this type of partnership. For example, you give the task of accounting to a specific company. You get to put more focus on in-house activities while they keep a close and detailed account of your finances and finances are of importance to every single business, and hence these relationships are the most crucial to foster. the most important relationships you can foster.
Merits of Strategic Partnership Agreements
Strategic partnerships can deliver major benefits to startups and established companies alike.
- It gives small companies exposure and allows them to access new markets, mitigate risks and cut costs. Other than that, it also gives them opportunities for growth as using the partner’s networks in the relevant market and taking the help of a well-established brand image can help the company to grow faster than it would’ve on its own.
- Sometimes, collaboration with a local market is the sure-shot way of entering a specific market. It also reduces political risk which may arise when there’s a new entrant in the market.
- It is found that a larger number of business enterprises opt for strategic partnerships to get exposed to more innovative products.
- Partners in a Strategic Alliance can help each other by giving access to their respective resources, (personnel, finances, technology) which enable the partner to produce its products in a higher quality or more cost-efficient way.
- When companies pool their resources and enable each other to access manufacturing capabilities, economies of scale can be achieved. Cooperating with appropriate strategies also allows smaller enterprises to work together and to compete against large competitors.
- Partnerships can also help lower costs, especially in non-profit areas such as research and development.
- The partnership allows firms to share their skills such as technical know-how, expertise, market knowledge, etc. leading to synergistic effects leading to combined resources which have the potential to give a better than ever product.
- A strategic relationship may also increase brand awareness and consumer trust. By partnering with established companies, you’ll find it easier to grow your customer base and earn authenticity to be a household name. More people will find out about your business and purchase your products or services. This leads to higher revenue and a better return on investment.
Risks and Pitfalls
The thing which is of utmost importance is a clarity of goals. You should be clear about what you want. Most often, misunderstandings and conflicts occur because parties don’t essentially understand the meaning of strategic partnership. They are unwilling to cooperate and have conflicting interests. Ambiguity with respect to goals and terms of the agreement can lead to doom. If an easygoing and transparent relation isn’t present, it can be very hard to sustain it in the long run.
Other than that, the partner is a strategic partnership that might become competition one day if profited sufficiently from the alliance. Also, since the agreement requires partners to share resources and the technical know-how, the partner might not be willing to stick to such an agreement.
Another disadvantage is that the “weaker” partner might have to give in to the wishes of the more powerful one, due to a disproportionate distribution of powers.
To tackle all this, it is necessary to list out everything properly and be clear with respect to your mission. Don’t say yes for the sake of it. Choosing the right business partner is of utmost importance in avoiding a high failure rate. Partners need to treat each other nicely, as they would treat their clientele. It should be based on mutual respect and trust and both partners must contribute equally and communicate to resolve any existing issues between them.
Conclusion
From the above article, we observe that strategic partnerships, if carried out successfully, is the way forward to assured success for both parties. However, while keeping in mind the risks, efforts should be made in fostering a healthy relationship between the partners. There should be mutual respect and trust, and transparency between the parties is a key component. Issues should be freely communicated and both parties need to contribute equally so as to carry out the business in a manner suitable to both.
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