SixSixFive Case Anal One
Introduction
- Thesis Statement
Partnerships are very important in gaining competitive advantage in a business environment. There are risks associated with partnerships which must be isolated and mitigated. Entrepreneurs must evaluate their partners before entering into a partnership deal.
- Purpose of Paper
The purpose of this paper is to determine the factors that compel firms to form partnerships, risks associated with small and large firms in a partnership and areas to look at before entering into a partnership.
- Overview of Paper
The paper starts by evaluating the factors that push firms to forms partnerships, it then analyses risks of partnership to large and small firms alike and ends by investigating areas to look at before entering into a partnership deed with another firm.
- Factors in the business environment that encourage firms to partner to compete
There are several factors in the business environment that encourage firms to partner to compete. In instances where two firms have complementary competencies then they will be motivated to partner to compete. For example, one firm may be very good at innovation and product development whereas another may be good in marketing and distribution. In this case the firms will be motivated to partner to compete in the market since they will benefit from each other’s core competences to maximize returns (Konde, 2008). This kind of partnerships is more prevalent in the pharmaceutical industry whereby firms that are good in research and development of new medicines partner with large companies that offer superior marketing and distribution networks to compete. This enables the smaller firms mainly involved in research and development of medicines to commercialize their inventions and the larger firms to grow their revenues (Moncrief, 2010).
Another factor which forces companies to partner is increase in competition in the markets they operate in. In markets where the level of competition is very high firms may partner to counter the intense competition. Firms may find that by partnering they will be able to have a bigger impact on the market than when operating as separate competing entities (Moncrief, 2010). This is because they will be able to have more resources at their disposal in terms of financial and human skills set that they can leverage on to compete in the market. Firms also partner to integrate their activities so that they can benefit from the resultant synergies. For example if one firm’s products are inputs for another firm, the two firms may partner to benefit from associated synergies. This ensures the firm that produces inputs for the other has a guaranteed market whereas the other firm has adequate and reliable raw materials (Moncrief, 2010).
In instances where a company intends to move into overseas markets, partnerships such as joint ventures, strategic partnerships, etc. are very crucial. The reasons are that the local partners understand the market better; are familiar with relevant government policy requirements and understand the culture in the target market. In some cases government policy requirements are that foreign firms intending to move to their jurisdictions must cede a certain percentage of their shareholding to local partners (Moncrief, 2010; Konde, 2008). Another factor is technology challenges. In capital intensive sectors, firms form partnerships to access and benefit from the latest technology in the market. This enables them to compete effectively. Firms may also partner to set prices especially in an oligopoly. In this market the firms operate like cartels whereby they set prices to maximize returns (Hill & Silverman, 2000).
- (i) Risks that small firms face when partnering with large, successful firms
Small firms face a number of risks when partnering with large firms. A small firm’s shareholding could be diluted to a point that they have little or no role to play in the running of the new company. Usually big firms have large balance sheets and their share capital is many times more than that of small firms. When the two firms merge, the balance sheet of the larger firm is literary swallowed up (Moncrief, 2010). The type of partnership that firms form is very important in this case. Instead of a merger, small firms can enter into strategic alliances whereby their shareholding is not diluted.
The other risk that small firms are exposed to is loss of trade secrets and experienced staff. Large firm in a partnership might poach all the skilled personnel from the small firms making them less uncompetitive. Large firms can also buy off the small firm’s trade secrets which would be disadvantageous to the small firm (Moncrief, 2010). This is because once the large firm obtains the trade secrets of the small firm it can opt out of the partnership and start competing directly with the small firm. The small firm’s survival will be jeopardized as a result. Small firms face market risk when they join large firms. This is because large firms tend to take over the customers of the small firm since they are able to undercut in price due to scale advantages (Moncrief, 2010; Konde, 2008).
Large firms may fail to honor their part of the partnership deal which will force the small company to go to court to be remedied. The obligations may include licensing royalties etc. The risk is that the legal costs may be too high for the small firm to meet which may threaten the survival of the firm. The small firm may also be unable to access financing to execute large orders from the large firm which may force it to take up huge loans from the large firm. If the large firm cancels the orders for any reason, the small firm may be forced to shut down (Moncrief, 2010; Konde, 2008). The large firm may also sue the small firm in a partnership for failure to meet its obligations which may affect the survival of the small firm.
- ii) Risks to large firms when they rely on small firms for innovation
The risks that large firms face by relying on small firms include the risk of not meeting contractual obligations. The large firm may place large orders which the small firm may be unable to supply due to operational and financial limitations (Moncrief, 2010; Konde, 2008). This will force the large firm to lose market share and revenues. The other risk is financial in nature. Small firms are likely to approach the large firm for financial assistance to carry out research for new products. These funds may not yield any fruits which may force the large firm to lose resources that they could have deployed in better areas. Small firms are more likely to lose skilled personnel due to their limited nature of resources. Large firms may realize that the small firms have lost qualified staff and are unable to carry out innovation after committing a lot of resources into the partnerships (Moncrief, 2010; Konde, 2008).
The other risk is poor management of the small firm. Since small firms have limited resources they may be unable to hire qualified and well trained professional managers. The firms will be unable to provide quality products to the large firm. They may also be wound up laeding to loss of revenue to the large firm.
- How government policies might affect partnering actions between small and large firms in the pharmaceutical industry
Government policies might affect partnering actions between small and large firms in several ways. The first of these are policies relating to licensing royalties. The government policies on taxation on licensing royalties are bound to affect the relationship. If the small firm realizes that it will not generate enough royalties to cover its expenses and make a return on its investments then the relationship will be affected (Moncrief, 2010; Konde, 2008).Government policy on requirements to be met before a partnership is registered may be too stringent that the small firm is unable to meet.
Government policy on investments made by the larger firms on research and development is also critical. Small innovation firms in the pharmaceutical firm may not have sufficient funds to carry out research. They are likely to approach large firms for assistance to carry out research. Government regulation on these funds is important (Moncrief, 2010; Konde, 2008). Other government policies on medical research touching on the stages of innovation and development before it can be commercialized are also critical. The government is charged with ensuring all drugs released into the market are safe. Small drug innovation companies are required to subject their innovations through various tests before they can be allowed to commercialize their drugs. These policies may impact on the partnerships in the medical field (Moncrief, 2010).
- Areas to look at before forming a partnership
The areas that I would look at before forming a partnership includes ownership structure of the entity I am intending to form the partnership with. It is important to know the persons behind the entity. This is to ensure they are credible and reliable. The other factor to consider is the legal standing of the entity. This is to ensure that the entity is legally registered by the authorities in the right manner. Getting into a partnership with an entity that is not registered risks closure by the authorities (Moncrief, 2010; Konde, 2008).
The other factor is the reputation of the company and the faces behind it. Entering into a partnership with a firm that has a bad reputation in the market will erode the goodwill of the new firm. It will lead to erosion of value and it may never regain its reputation again. The reputation of the owners and senior managers is also important (Moncrief, 2010; Konde, 2008). This will determine whether the partnership deed agreements will be honored or not. The other aspects to consider include financial soundness of the new firm, markets and marketing strategy of the new firm, skills set of the staff, operational competencies all of the new firm in the partnership etc. These factors determine the firm’s ability to meet its obligations in the partnership deed (Moncrief, 2010; Konde, 2008).
Conclusion – Summary of main points
Partnerships are a source of competitive advantage for small and large firms alike. Firms should however not enter into these partnerships blindly. Each firm in the partnership must evaluate its partner to determine whether it’s able to meet its partnership deed obligations. Each partnership imposes several obligations to each firm in the partnership which must be met. Each firm in the partnerships must evaluate the risks that are related with the partnership and develop mitigating strategies to mitigate those risks (Moncrief, 2010; Konde, 2008).
Lessons Learned and Recommendations
Lessons learned are that it is important to evaluate each firm intending to enter into a partnership with because it will determine whether the objectives of the partnership will be realized or not. It is also important to consider government policies relating to partnerships because they are able to affect the partnership either positively or negatively. Each firm in a partnership must evaluate the risks relating to it and develop strategies to mitigate those risks.
References
Hill, A., & Silverman, G. (2000, Aug 31). Smaller firms need partners to compete WHO’S
NEXT?: Financial Times. Retrieved from http://search.proquest.com/docview/248920252?accountid=45049
Konde, V. (2008). Biotechnology in india: Public-private partnerships. Journal of Commercial
Biotechnology, 14(1), 43-55. doi:http://dx.doi.org/10.1057/palgrave.jcb.3050079
Moncrief, K. W. (2010). The impacts of alternative alliance partner policies of big
pharmaceutical firms and their smaller biotechnology partner firms: A system dynamics approach. (Order No. 3436592, The Claremont Graduate University). ProQuest Dissertations and Theses, , 509-n/a. Retrieved from http://search.proquest.com/docview/817401326?accountid=45049. (817401326).
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