While the benefits might be alluring, startups should be wary of forming alliances with too many large companies, new research finds.
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When forming partnerships, small startups should focus on quality, not quantity, a study set to appear in an upcoming issue of Organization Science finds.
Researchers discovered that startups gain the most benefit by having just a small number of carefully selected alliances with larger organizations. By aligning with established companies, small startups can gain valuable access to additional resources and markets; however, as these small businesses add more outside partners, their internal capabilities will eventually weaken, the study found. When that occurs, the cost of maintaining alliances will exceed any remaining benefits for young firms.
Ramin Vandaie, one of the study's authors and an assistant professor of operations management and strategy in the University of Buffalo School of Management, said partnerships offer mutual benefits. Established companies can tap into a startup's cutting-edge technologies and potential for innovation, while young firms acquire knowledge and status from experienced partners, he said.
"But more is not necessarily better," Vandaie said in a statement. "We found the benefits of alliances with larger companies do not increase proportionally with the number of partners, but instead start to level off and turn negative as more partnerships are formed."
Overall, the research revealed that highly specialized firms experience larger benefits from alliances than do more generalist organizations. [15 Creative Financing Methods for Startups ]
"Small, specialized firms that have the opportunity to align with larger firms should put their expansion plans on hold to gain the full benefits of those partnerships," Vandaie said. "Later, they can use their newly developed capabilities as a basis for growth and a more reliable path to expansion."
Even though researchers focused their analysis on independent film production studios and their partnerships with major studios, the data can be applied to many industries, particularly creative fields like publishing or advertising, and professional services like accounting or law firms, Vandaie said.
The study was co-authored by University of Minnesota Carlson School of Management professor Akbar Zaheer.
Originally published on Business News Daily.