Friday, May 23, 2008

The value of building strategic networks

Historically, the green industry has been very fragmented in terms of the size of firms in the industry and the diversity of what they do. This has also meant that growers, service providers, and retailers have been very independent in nature.

In recent years, however, we have seen more interdependent business relationships develop in the form of contract growing, strategic alliances or networks, and joint ventures. In the trade press, we have seen feature stories on folks like Novalis, Bell Nursery, etc. and the advantages of operating as a network rather than an isolated firm.

There are several who have asked me whether I thought such networks are a good idea. The answer, of course, is it depends on what you want those alliances to do for you -- there are advantages and disadvantages. Here is a quick summary of each:

Potential Advantages of Partnering Networks and Alliances

  • Better access to markets
  • Improved cash flow
  • Reduced overhead
  • Improved access to capital
  • Obtain capital that would have been otherwise unavailable
  • Credibility is enhanced
  • Access to facilities and technology
  • Access to managerial/marketing expertise
  • Ability to keep the company small
  • More products to sell
  • Innovative products
  • Creative people
  • Gain cost advantages through scale and locational economies
  • Speed and flexibility in delivering new products
  • Ability to hedge your own R&D efforts
  • Less costly than buying a company
  • Cost savings
  • Product distribution
  • Diversification into new markets
  • Manufacturing capability
  • Reduced risk
  • Knowledge and know-how
  • Avoid need to reinvent what has been invented elsewhere
  • The shoring up of weak areas in the company
  • Strengthened relationships with key suppliers or customers
  • Ability to move quickly
  • Ability to stay focused on core competence
  • Realize political or legal advantages via relationship with a partner enjoying regional or national recognition.
  • Exploit multiple synergies in production, marketing, and finance.

Potential Disadvantages of Partnering Networks and Alliances

  • Significant time required to build trust
  • Greater relationship risk
  • Sharing of future profits
  • Opportunity cost of losing other opportunities
  • Barriers to future financing opportunities
  • Distractions of relationship building
  • Creating a competitor or a potential competitor
  • Unexpected disappointments and headaches from your partner
  • Create indirect costs by blocking the possibility of cooperating with competing companies
The bottom line:
Formal contracts do not make successful relationships.
People do.

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