Prosperous partnerships

In addition to "knowing your customer" – a business mantra of the last decade – companies today must get to know their potential partners. Nearly every CEO I talk with says competitive pressure is driving main initiatives. Reducing costs and increasing distribution channels are common initiatives for short term survival or profit growth.

Frequently one of those initiatives is determining what companies would make a worthy partner; either through a merger, acquisition or some other joint benefit arrangement. Competitors, particularly in industries with margin pressure or slow sales growth, are often a logical choice to partner with. Although we use a manufacturing example here, it’s equally applicable to service firms by substituting "service" where "product" has been used.

How can you identify which competitors would make a good partner? First, list three to five of your top competitors and answer the following questions:

Do we serve the same customers or markets? List your top 10 customers and estimate the top 10 customers of your competitors. Significant customer overlap can dilute the value of a partnership. If a partner doesn’t bring along a new customer base, be certain it brings along significant technological advances or production efficiencies. Be prepared to pass along some of these benefits to your customers or you will find yourself in a bigger company with fewer customers.

Are our products substitutes or complementary? List your top products and the top products of your competitors. Substitute products with the same customer base may spell disaster for a partnership, while complementary products with different customers offer excellent potential for growth. In this situation, the partnership can leverage the relationship each company has with its current customers to create another distribution outlet for its partner company.

The value of different products to a merged entity is highly dependent upon the synergies that can be created in manufacturing, distribution and sales in a "new entity." If the synergies are small, the value of each partner’s customers to the other partner must be high to create value for the new venture.

Figure 1 plots the percentage of same products and common customers for potential partners. The quadrants are labeled to describe where growth in the new venture will come from. It’s a common mistake for companies with similar products and common customers to conclude the synergies from a merger will improve profitability. It’s more likely the loss of sales will dwarf the impact of cost savings or manufacturing and distribution improvements.

Figure 2 does the same for complementary products. If you have any potential partners that fall into the upper left quadrant of Figure 2 you have identified a partnership in which each entity brings a tested distribution network for the other party’s product. Partnerships that fall into this quadrant have great potential but are often difficult to find. You may have to expand your search beyond your current competitors. Learning about the other top suppliers for your top customers may help identify good partner candidates.

How do our cost structures compare? Don’t let the fact a company is private get in the way of good analysis. You can piece together valuable information by knowing their organizational structure, labor situation, where their plants are, their product mix and who their customers are. Normally this information is readily available – often through people in your company. Frequently companies assume a cost structure similar to their own and miss opportunities to take advantage of wide cost disparities.

You have now have identified your top partner candidates, the potential sales growth of a partnership and any efficiencies or synergies that may be realized through a partnership. Armed with this information you can model the financial potential of a partnership and come up with the value to your business.