United States Department of Agriculture
Foreign Agricultural Service

Forming Alliances: Creating a Forest from the Trees
Ag Exporter Magazine, February 1996.

by Eric Trachtenberg, Forest Products Division, FAS

Taking the time and money to master the basics of exporting - learning about shipping, documentation, market research and creating relationships - while manageable for a large company, can be overwhelming to a small business. Many small firms lose the chance to export because they can't afford the costs and risks of doing business overseas.

One way to overcome this barrier is for small businesses to form an alliance that joins the forces of several organizations.

Strength of the Forest
Northwestern forest product manufacturers have profited from WoodNet, an organization that combines the efforts of more than 300 firms from five counties on Washington State's Olympic Peninsula.  WoodNet was started in 1991 to share purchasing and professional services. It now offers a catalog with products from its members. Although WoodNet concentrates on value-added products such as furniture, kitchenware and arts and crafts, it also offers lumber, siding, windows and panel products.  At least half of the members attributed their improved profits to WoodNet, stating that the organization was "significant" or "very important" to the continuation of their businesses, according to a 1993 survey.  One-fifth of the member firms increased sales by nearly 20 percent. Another 28 percent expanded their international marketing strategy during the first two years of membership in the organization.  WoodNet also has increased the amount of information exchanged between individual businesses. As a result, nearly 80 percent have developed new products.  WoodNet is planning for the future by working to secure funding for a multimillion dollar technology center to support local businesses.

Networks Effective in Europe
Networks have been used effectively in Europe for many years. Since 1956, networked firms in Mondragon, Spain, have had a business failure rate of less than 5 percent.  The Emilia-Romanga region of northern Italy, where flexible networks dominate the economy, has the second highest average income in the country. Wages increased from 90 percent of the Italian average in the 1970s to 125 percent today.  Growth in that region has also been strong. Emilia-Romanga's growth rate is 50 percent above Italy's average.

Overcoming the Hurdles
Despite the benefits,
it is not easy to organize an effective alliance.  There are a multitude of export business groups, including flexible networks, cooperatives, export trading companies and trade associations, offering benefits ranging from information sharing to profit sharing.  It is important to know what type of organization to develop. Some types of alliances include:

* "Soft" non-profit networks to share information between members.
* "Hard" networks to pursue business ventures for profit.
* "Vertical" organizations where each member produces different components or contributes a value or service along the marketing chain of the final product.
* "Horizontal" networks for firms that make similar or competing products and share information with each other.
* "Knowledge" networks that allow businesses in unrelated industries to share services and learn about other businesses.

It can be difficult to organize a group with members from a large region or for competing businesses to overcome a history of mutual mistrust.  Another consideration is financing. To survive, a network needs a well-designed financial plan that accounts for initial startup costs and later day-to-day operations.  When organizing alliances, it is critical that any network be developed with the members' resources in mind, and that the alliance be run by industry. Networks have failed because they have been underfinanced, too ambitious or unresponsive to member firms.

Another concern is antitrust. However, those working with alliances note that they rarely have problems with antitrust issues as long as they do not attempt to dominate a market by restricting membership or fixing prices. To prevent any potential antitrust problems, consult with an attorney or seek advice from a state department of commerce, agriculture or economic development.

Joining Forces
Networks combine the efforts of small organizations, creating an economy of scale by spreading international marketing costs and export risks over many firms instead of just one.  There are other possible benefits to working together. Uniting can allow firms to create a sufficient volume of products to interest a potential importer or can expand the range of products available to sell overseas.  Alliances can also increase access to capital, aid in the development or adoption of new technology, spur innovation, strengthen strategic planning, increase leverage in purchasing and allow firms more control over their marketing.  General guidelines for forming alliances are provided in the "Export Trading Company Guidebook" from the Government Printing Office at (202) 512-1803. Rules for permissible export alliance conduct are laid out in the "Antitrust Enforcement Guidelines for International Operations," which is available from the U.S. Department of Justice at (202) 514-2481