Case Scenario: Types of Partnerships That Are Common in Business Plans

Because new businesses are resource constrained, they often make partnering an essential part of their business plans. As illustrated throughout this book, effective partnering can help a start-up in many ways. The following are examples of the types of partnering scenarios that are common in business plans. smaller Companies partnering with larger Companies to bring their products to Market Because the cost of bringing a new drug to market is so high, biotech companies commonly partner with large pharmaceutical companies to bring their products to market. Biotech companies specialize in discovering and developing new drugs-it's what they're good at. In most cases, however, they have neither the money nor the experience to bring the products to market. In contrast, the large drug companies, like Merck and Pfizer, specialize in marketing and selling drugs and in providing information to doctors about them. It's what they're good at. As a result, most biotech firms' business plans plainly state that their mission is to discover, develop, and patent new drugs and that they'll partner with larger pharmaceutical companies to bring the products to market. smaller Companies partnering with larger Companies to produce, Fulfill, and/or ship their products Many new firms, from the get-go, structure their business plans on the notion that partners will produce, fulfill, and ship their products. As a result, a start-up that develops a new type of board game may have the game made by a contract manufacturer in China, have it shipped from China to a warehouse and fulfillment company in the United States, and when an order is placed (by a retailer such as Barnes & Noble or Walmart) the warehouse and fulfillment company ships the product to the buyer. While there are costs involved at every step in the process, this arrangement frees the board game company to focus on designing and marketing products and reduces its initial capital requirements.

A variation of this approach, for catalog and Web-based companies that sell other manufacturers' products, is a method called drop shipping. Drop shippers like eBags, which is an online retailer that sells luggage, backpacks, and similar items, do not warehouse anything they sell. Instead, when eBags receives an order it passes the order on to the original manufacturer (or distributor), which fulfills the order, often in an eBags box with an eBags packing list so it looks as though it came directly from eBags. This arrangement costs eBags money, but it is integral to eBags's business plan of offering a wide selection of products to customers at affordable prices and not getting caught with outdated merchandise. smaller Companies Outsourcing Human resources Management tasks An increasingly common feature in business plans is to outsource human resource management tasks that are labor intensive and require specialized expertise. Some start-ups outsource only administrative tasks, such as payroll processing and benefits administration. These firms partner with payroll accounting firms such as Paychex or TriNet. Other start-ups outsource a broader range of their human resource management functions and partner with a company such as ADP or Administaff. These companies are called professional employer organizations (PEOs) and act as an off-site human resource department for a start-up or other firm. Along with doing everything that Paychex and TriNet does, PEOs can help a start-up with hiring, firing, training, regulatory compliance, and other more in-depth human resource-related issues. Outsourcing these tasks can minimize a firm's investment in human resources management personnel and support (such as software products) and frees a company to focus on other core activities.

Questions for Critical Thinking

1. What factors in the business environment encourage firms to partner to compete?

2. What risks do small firms face when partnering with large, successful companies? What risks do large companies take when they partner with small start-ups?

3. Describe two reasons (that aren't mentioned in this feature) why a small firm would partner with another firm. Provide an example of a partnership that fits one of the reasons.

4. The "You Be the vC 6.1" feature focuses on Buzzy, a company that has created a device that helps relieve the pain and axiety associated with getting a shot. What types of partnerships could Buzzy form to lower its capital requirements and allow its top management team to focus on its distinctive competencies?