28 Steps to a Strategic Alliance
Think strategic alliances are only for high-flying high-tech companies? Think again. When Ruth Owades first crafted close partnerships with suppliers in her industry, she didn't even have a company yet
* * *
The first time Ruth Owades went into business for herself, she did it the conventional way. While working at CML Group, in Acton, Mass., then the corporate parent of four mail-order catalogs, Owades hatched an idea for a catalog of upscale gardening paraphernalia. Avant Gardener, she wanted to call it; she would operate it under the CML umbrella. When CML decided to pass, the Harvard M.B.A. set out on her own and spent three years, beginning in 1978, growing the new company, renamed Gardener's Eden. In the process she opened up a new catalog-industry niche. But what was conventional about Gardener's Eden was that it was an independent venture -- Owades and her business were, for all intents and purposes, going it alone.
Not so Owades's second time around. Calyx & Corolla, which she founded in 1988, is also a catalog operation and sells flowers and plants. Orders are processed at the Calyx office in San Francisco, and the flowers are shipped directly from growers to customers via overnight delivery. But whereas few partnerships were key to the success of Owades's first business, her second venture is completely dependent on alliances with the growers and the shipper.
That second venture was a long time coming. Back in 1982 Owades sold Gardener's Eden to Williams-Sonoma, a cataloger offering the financial resources needed to expand Gardener's further. The deal required that Owades relocate to San Francisco and run Gardener's for five years -- which she did, building it to $15 million in yearly sales. In 1987, at age 39, she had a choice: stay or go. "I decided that if I didn't leave, I'd wake up 20 years later and be doing the same thing," she says today. "I certainly sensed there wasn't a future for me in the corporate management of Williams-Sonoma, because no women had made it there before, so it just seemed right to sever the ties and find something new to do."
She figured she'd relax. After nine years of high-speed company building, she relished getting back to her tennis game. She took a cheap office in a warehouse district of San Francisco. She spent more time at her weekend house, in Napa Valley, where her husband, Joe, a beer designer admired in the industry for his work with Anchor Steam ale and Samuel Adams beer, would take over the kitchen with his new concoctions.
Owades also began entertaining at home again, pointedly catching up with friends. She'd stop by the wholesale market near her office and pick up fresh flowers. Which is when the idea for a flower catalog started to dominate her thoughts.
That's also when, slowly, her plot to start a business by allying it with larger, reputable companies began to take shape as well. Though strategic alliance has become a hot catchphrase among business thinkers, Owades knew that if the relationships she had in mind were to work, she would have to beat long odds. At best, just one in three alliances in business is truly successful. She'd have to select and recruit her allies wisely and then make the relationships work. If they didn't, she'd fail.
Here is Ruth Owades's story: the step-by-step process by which she built the alliances that brought Calyx & Corolla to life.
Contemplate alone. Owades didn't plan to start another catalog company -- in fact, she had been trying to leave herself open to just about any other kind of venture. "For a really long time I had been telling people who had called me for advice that this is not a business to get into anymore," she says. "Expenses are much too high, and the market is flooded."
But the idea of a flower catalog stuck because the concept made sense. Most flowers are cut, transported to a wholesaler, transported to a distributor, transported to a retailer, and transported yet again to a customer -- taking anywhere from 6 to 10 days on average to go from soil to vase. As Owades envisioned it, flowers chosen from a catalog, in which customers could see exactly what they were buying, would be cut one day and reach the recipient the next. Not only would the process put customers more in command of their orders, but the flowers would be more vibrant and longer lasting. By her calculations it could be done at prices comparable with those for ordering flowers via Florists' Transworld Delivery (FTD).
Brainstorm with others. In December 1987 Owades revealed her idea to her husband. "You know, when you have an idea, you're almost afraid to say it to anyone, because you don't want anyone to say, 'That is the dumbest thing I ever heard.' But he said, 'That's really interesting.' "
Research the idea and the industry. "It was a matter of sleuthing. I went to the library and sat in front of the index and looked up everything -- flowers, florists, marketing flowers, advertising flowers -- to see what was happening in the industry generally, but also specifically with distribution. My first job when I was a kid was in the library, so the research part of any project is fun for me. I think inherently I had a lot of confidence in the idea. What I needed was confidence that it was really possible to do."
* * *
The flower industry, Owades found, is a traditional and essentially unsophisticated one. While over the past decade some growers have moved to become more "value added" -- preparing, for instance, small packages of flowers for supermarkets to sell -- the industry remains dominated by small family growers. Still, it has grown about 10% a year since the mid-1980s to become about a $10-billion business today. Although there had been some halfhearted attempts at selling flowers through mail order, none had taken off. The closest concept in operation was 800-Flowers, a $25-million company that offers centralized ordering but still works within the traditional system of sending out purchases from shops in the FTD network.
Even if it was possible to ship flowers (and how would you transport an armful of spring blossoms? or a potted orchid with a quarter-inch stem? or a bonsai tree?), Owades's idea still presented three clear -- although almost nightmarish in their logistics -- challenges.
First, growers would have to adapt the way they work; they'd be in the upscale-gift business, not just the agriculture business. Instead of crating 500 stems of flowers for wholesalers as they normally did, the growers would be wrapping 12 roses in lavender tissue paper, tying the bouquet with a pretty bow, and attaching a handwritten note and care instructions just so, for a single customer. Owades envisioned hooking the growers via computer to her company. But many of the growers, she'd soon find out, didn't even have fax machines.
Second, she'd need to get an overnight shipper that was used to moving lots of flat envelopes to take on weirdly shaped boxes and accommodate extremely perishable products.
Third, even assuming she could set up a failproof computer system that would enable her to promise exact delivery dates, how could she change the buying habits of potential customers? Could she get them to care?
* * *
Research the needs of potential partners. To growers, Owades would promise sporadically heavy but consistent business. ("We'll get them orders the day after Valentine's Day," she says.) Owades also began to understand how the needs of the shipping industry were shifting in the wake of increased competition and fax machines. "When I was in business school I had studied the Federal Express start-up case. I knew carriers like Fed Ex were having to change their mind-set -- they had filled these planes with lovely flat envelopes and now were having to adapt to the challenges of moving boxes."
Evaluate yourself from your potential partners' perspective. Owades brought to the table knowledge of the catalog industry, access to capital (people had told her to call when she came up with her next big idea), energy, and smarts. "Gardener's Eden gave me credibility. I don't think you could attempt a project of this magnitude without that kind of credibility." But her visibility presented a problem, too. "If nobody's paying attention, you can stumble a little bit. That's one of the reasons I wanted to start big: with so many people watching us, the risk of competition was sizable. If it was going to work, we really had to carve out a niche quickly and establish ourselves." Her early goal: $3 million to $4 million in sales by the second year.
Think about financing. Figuring she'd need an expensive computer system, a splashy catalog, an 800 phone number, and cash to carry the company through several years of anticipated losses, Owades calculated she'd require $2 million. But she felt confident that raising money would, for her, be one of the easiest steps. "The financing didn't come last, but it didn't come until after I was secure, until I had one or two growers lined up."
Consider legal protection for the idea. This was simple: Owades didn't think she could get any protection.
Write a plan. In January 1988 she bought books on business plans, looked at a couple of samples, and decided that "most of them are too long and boring." Reading that the average plan is 45 pages long, she decided to bring hers in at half that. "The process of writing uncovered the logic of the business and brought up smaller questions -- not megasubjects, like what are the risks -- but what happens when the box is delivered and no one's home? Those little operational things needed answers from me."
Start recruiting a management team. In February Owades began mentally lining up her crew. When she called Fran Wilson, a former colleague at Williams-Sonoma who is now Calyx's vice-president of operations, Owades said, "I have this idea. I'm not quite ready to tell you what it is, but do you have any interest at all in doing something entrepreneurial?" Not only was Wilson interested, but she volunteered to sign on, sight unseen, to whatever the "it" was that Owades was plotting. ("I knew I wanted to be in a start-up," says Wilson, "and I knew I wanted a woman mentor.") Owades definitely wanted several experienced people on board from the start. "The hardest part of being an entrepreneur is that loneliness, feeling as if no one is holding a net underneath you. I was very conscious of not wanting to start this by myself the way I did with Gardener's Eden."
Find advisers to poke holes in the concept. After her husband, the first person who heard about Owades's idea was Barry Traub, a lawyer and businessman. Another informal adviser was Stanford Business School lecturer Irv Grousbeck, a cofounder of Continental Cablevision, whom she'd met when he was teaching a case study about the start-up of Gardener's Eden.
With them, Owades would speculate about why the company might not work. "It's such an advantage if you can get people to tell you where the problems might be. Being surprised is the worst thing for an entrepreneur."
Decide which kind of partner to talk to first. Owades now felt she'd zeroed in on her concept and was ready to begin considering potential partners. "I approached growers first, before shippers and financiers," she says. "I felt I needed to know there was at least one grower who was willing to do this."
Check out particular partner prospects. "I went down to the flower market and asked for references and found out who the important growers of specific flowers were. I was reading trade journals, too, and certain names started coming up more frequently," she says. Owades cold-called people to talk not about going into business together but about the industry, how they sold flowers now, and the feasibility of mail-order flowers.
Determine the criteria for a partner. "It wasn't just finding someone willing to work with me. The growers had to meet certain criteria: quality, specialization in a particular flower variety, and commitment to service. And then it was, who will work with me?"
Spill the beans to a potential partner. Owades actually had one advantage: several years before, she had dealt with one grower who had supplied flowers briefly to Gardener's Eden. She talked to the grower, Peter Barr, on the phone about her idea, then drove out to Watsonville, Calif., to meet with him at his business, Sunbay Growers. After reading her business plan, he was intrigued enough to do some testing with her.
* * *
"We have an industry that's oversupplied with flowers," says Barr, "and I'm always looking for different ways to sell them." In February 1988 Owades and Barr dived into figuring out how to preserve flowers during shipping. They experimented with different sizes of boxes, various ways of securing the flowers, and an assortment of padding. They did test shipments to a dozen sites (family and friends) across the country. Barr wasn't charging for his time, although Owades was picking up the cost of materials. After a couple of weeks the basic concept of shipping bundles of flowers seemed feasible.
"My reaction to the idea, candidly, was that I was glad it was her money," says Barr. "The mailing lists, the computer systems -- I knew catalogs were expensive, but the size of the venture just to start and the amount of money she had to raise made it risky. I agreed with the concept from the beginning, but I was more leery when I saw the numbers she had to generate." Still, Barr agreed to be a partner if the company took shape.
With one grower in her pocket, Owades was ready for the next step: finding a shipper to work with her.
* * *
Evaluate other potential partners. "Instinctively, because of the reputation and stature it would give our business, I felt my shipper had to be Federal Express," says Owades, who had researched carriers the way she had investigated growers -- by reading articles at the library and annual reports. With help from Fran Wilson, who had begun working informally on the venture, Owades went through the motions of talking to other candidates. "Airborne, Emery, and a variety of others at the time were very eager to have the business and were very competitive on price but could not promise the lift capacity, the airplane space out of specific locations -- growers often are located out in farm country -- and a guarantee on a day-in, day-out basis to move product. We were guessing that some growers might eventually need to ship 5,000 boxes on a given day, and the other carriers just couldn't commit to it.
"Thinking about Federal Express was tough because it's so big," she continues. "Who was I? I was nothing. I didn't have a business, I had an idea." (She didn't even have a name: the company wouldn't be dubbed Calyx & Corolla until right before the catalogs were printed.) And she was asking for more than just an account number: she needed her partner to offer competitive prices, install a computerized package-tracking system at her office, and agree to such things as leaving flowers at a customer's door without a signature.
Figure out whom to contact first at potential partners. In approaching Federal Express, there was an obvious place for Owades to start: the company has district managers who handle different areas of the country; their job is to get new accounts and service them. That's where Owades began in February 1988.
Wend your way through the corporate structure. "Lynn Anderson, the district manager, was saying, 'Your idea is impossible -- but wait. Maybe if you call so-and-so in Memphis [the site of Fed Ex headquarters] . . . ' " explains Owades. "I'd call Memphis and ask people what their roles were, could they help me. I was respectful of busy people's time, so before the call, I made sure I could articulately say what the concept was and what I wanted from them. I'd write it out on paper.
"Every person I talked to gave me a little information. I'd ask, What are Fed Ex's goals with the catalog industry? Is the company currently in flowers? You don't always get answers, but you might. Very often it took half a dozen calls to get through to these people. I never expected them to call me back; they didn't know me."
* * *
"At the center of Ruth's effectiveness," says Stanford lecturer Grousbeck, "is that she can sit down across the table and get you to do almost anything."
Owades's persuasiveness served her well in plowing through the Federal Express maze. She was referred to a consultant named Jay Walker, who was searching out catalog business for Federal Express. He hooked her up with Fed Ex marketing chief Richard Metzler and with Mike Glenn, now senior vice-president of catalog services. "It helped that she'd done a lot of homework," says Glenn. "Plus, we had just begun an initiative to get more involved in catalogs." Nevertheless, between February and April of 1988 there were infinite phone conversations, faxes, and letters. Finally there came a definitive conference call involving Owades, the bigwigs in Memphis, and the local Fed Ex rep. Setting aside details of pricing, systems, and timing, Federal Express confirmed that it was on board to help make Owades's idea work.
* * *
Negotiate. The Federal Express negotiations were done without in-person visits. Owades agreed to take on legal liability for packages left without signatures, negotiated a volume-pricing schedule, and determined what size her company would need to reach within a year to keep everybody happy. Similar negotiations had to be made with the growers, who were being asked to prepare for unknown volumes of orders. "I can't say strongly enough that we were all figuring it out together," says Owades. "This wasn't something I rammed down their throats. I didn't know what the minimums would be, and neither did they. Everybody just knew that by the time the year ended, if we didn't reach certain volumes, no one would be very happy, most of all, us. It was a real experiment."
Impress potential investors. Owades put $150,000 of her own money into the company to show her commitment, and took a reduced salary. In addition, she went out on a limb: she sent potential investors flowers in boxes via Federal Express, the way they'd receive them if Calyx existed. It was a risk: if the flowers didn't arrive in good shape, she'd have blown her chances. The first business plans were sent out in May, and by June, 18 people had committed to the full $2 million Owades was seeking.
Train your partners' employees. "I took a sample box on a tour to the growers and showed them what to do and how to do it," says Owades. "Most were pretty small entities, with two or three people who'd be handling our business."
Solicit suggestions, especially from your partners in their areas of expertise. "From the very beginning I really enlisted the help of the growers. It seemed like the obvious thing to do, but it's also a good strategy because then people were invested in making things happen. I don't know that I thought about it that way, though; I just wasn't the expert. We solicited opinions from growers, Federal Express's packaging lab, and the box manufacturers, and we synthesized them."
* * *
Summer ticked along. Owades continued working out details with Federal Express and lining up growers. Fran Wilson officially came on board in July. Working out of the same one-room office, the two women bought a computer, had software designed, got mailing lists, and negotiated for a larger space. They nailed down pricing with growers, agreeing to wholesale plus a surcharge to cover additional personnel costs.
Now the business would depend on how successfully Owades met her third big challenge: getting potential customers to care. She hadn't done any market research on the idea; she admits she was betting $2 million of capital on little more than a gut instinct that customers would like the catalog and buy into the concept.
The biggest question, she thought, was not whether the price points were OK -- her experience in the high-end catalog industry made her confident that bouquets in the $30-to-$70 range were reasonable -- but more whether customers actually would understand what the catalog was offering, why it was different, and why she thought it was better. Calyx would have to change fundamental customer buying habits.
The catalog would be key to Calyx's initial credibility; it had to look, Owades felt, as if it had been around forever. There would be no promotion or advertising to support it. With everything gambled on the mailing's ability to do the selling, the first Calyx & Corolla catalog went out in January 1989.
* * *
Expect -- and deal with -- problems. Customers did, in fact, slowly buy the idea. The phones started ringing the first day the catalogs reached customers, and by Valentine's Day the company had logged 5,000 orders. But in those same first months things also went wrong. "There was no question that the growers were on board with what to do to get those flowers there safely, but the fussy part of how the boxes looked was harder," says Owades. There were little glitches, like the time Calyx ran a photo of how a bouquet would look, without confirming it with a grower, and the grower wasn't able to supply the greenery depicted.
Meanwhile, with Federal Express, Owades was learning that "when you're dealing with a $7.5-billion corporation, agreeing on something at the top management level is one thing, but for them to communicate that down to every courier on every route is another. We were the only company for which they had agreed to an automatic leave-it-at-the-door, and that's great in theory, but they really have to leave it at the door." (Federal Express helped by publicizing the Calyx story in its in-house magazine and in-house television program.)
Sever ties with a partner if you have to. Calyx dropped one grower from its brood of six in those first months because of inconsistent quality. "It was horrible, like having a problem in the guts of your own business. I knew we had to cut our losses quickly. We sent letters to everyone who had received flowers from this grower -- even though some of the packages were fine -- saying we were so sorry, we didn't realize what was going on, here's a gift certificate. We sent those to several hundred people, which at the time seemed huge."
Recognize that some things are hard to control. Calyx and its partners all share responsibility, but each displays a degree of territoriality. Says Abe Wynperle, the president of Miami-based Sunpetals, one of the largest flower growers in the world: "Ruth created the relationship with Fed Ex, but when it comes to managing the logistics on a daily basis, she does not get involved. All Ruth wants to know is that the package got there eventually; how it gets there is my problem and Fed Ex's problem." Of course, how it gets there is Owades's problem as well -- even if she isn't directly involved in solving it.
Moreover, natural disasters are impossible to control, and they abounded for Calyx & Corolla. On Valentine's Day during its first year, a freak snowstorm cloaked Memphis, the hub for Fed Ex flights, threatening delivery, and Calyx had to call many customers and tell them their flowers would be late. In October 1989 the San Francisco earthquake shut down Calyx's high-rise office for five and a half days, destroyed a warehouse, and badly hurt some primary growers. And a freak cold spell in California in December froze many stems. "I remember writing to my investors at the end of the year and trying to finish on an upbeat note," says Owades. "All I could think of was that the table of probability showed that Mother Nature does not strike three times a year two years in a row."
Do ongoing training. Federal Express flies a team from Memphis to Calyx's headquarters to train new Calyx employees before a busy season. (Telephone staffers get two weeks of training.) Calyx employees regularly visit growers to offer help. Wilson says Calyx and its growers are setting up a more formal quality-assurance program for the people picking and packing the flowers, one that may include bonuses and incentives.
Push interaction with partners down to many staff levels. Owades, Wilson, and Ann Hayes Lee, who came on as Calyx's vice-president of marketing in June 1989, aren't the only ones who nurture the alliances: for instance, Laura Goodman, the company's operations manager, spends about a day a week visiting growers. "Spreading the interaction with partners through a company is very important," says Owades. "At our company it's very, very important. The chain gets solidified at so many other places."
Make sure everyone gets credit. Owades has received repeated coverage in everything from the flower trade publications to the New York Times. In all her interviews she talks about Federal Express and the growers and how much they are all partners. Says flower grower Peter Barr: "Ruth is working to promote flowers, and we appreciate that. As a result, she has the top priority for getting our flowers if we're running short."
Make sure the CEO has time to maintain the relationships. Taking care of her alliances is probably Owades's primary task as chief executive. "I do some of the finance things, like communications with the investors and establishing the banking relationship. But I consider those relationships my job." She talks to each of her growers at least weekly and with both the regional Fed Ex manager and her Memphis contact monthly or so, at minimum. Owades keeps in touch with them by phone, fax, and, less frequently now, visits.
* * *
In the time since the business and the relationships on which it's based took their first steps forward, Calyx & Corolla has grown steadily. In 1989 it consisted of a core of 8 staff people, supplemented by part-timers who helped answer the phones during the busy seasons.
Today 25 people work for the company full-time, and up to 100 are added during the business's peaks. A bank of operators occupies an airy room downstairs from the main office space overlooking San Francisco. On one wall is a chalkboard listing the day's flower specials. Samples of all the vases and Calyx's dried-flower products ring the ceiling.
Twenty-five growers now work as Calyx's partners. Federal Express uses 18-wheel trailers to service the business, loading the brown flower boxes bearing Calyx logos and Fed Ex shipping labels via conveyer belt directly into waiting airplanes. On the busiest days some growers fill half a dozen trucks -- booked in advance -- with packages.
Calyx has had competitors: they've come and gone. One project, funded by a venture-capital group, lasted about a year. When the business shut down, Calyx bought its mailing list. Harry & David, a fruit-and-gift-catalog company, came out with a flower catalog in 1991, then left the market. A lot of mail-order catalogs, say Owades, dabble in one or two flower items, "but when flowers get attention, I think that just makes us look more the expert."
Because of its alliances, Calyx & Corolla has moved past the start-up stage sooner than most new companies do. In 1992 the company exceeded its goal of breaking even, posting profits greater than 5% on sales of $10 million. The average order in 1992 was $65.
In the summer of 1990 Owades raised another $1 million from her original investors. She is debating whether to take the company public or seek additional private financing or other relationships to obtain the cash to keep Calyx growing. While acknowledging that it remains a challenge to get potential new customers to catch on to the idea, Owades is still confident, she says, that Calyx & Corolla can eventually be a $100-million business. Her partners, so far, concur.
REMAKING THE CUT FLOWERS BUSINESS
Flowers are normally a week old or more when bought, whether purchased at a store or ordered by phone (in which case retailers are directed to make deliveries from their stock). Calyx & Corolla cut out three middlemen and, with the help of Federal Express, connected growers directly with customers. Customers call Calyx headquarters and order from a picture in the calyx catalog; Calyx transmits the order to growers by computer link, and customers receive flowers that are up to nine days fresher.
THE TWENTY-EIGHT STEPS
Here is the process by which Ruth Owades conceived the idea for Calyx & Corolla and developed the strategic alliances that enable it to exist
1. Contemplate alone
2. Brainstorm with others
3. Research the idea and the industry
4. Research the needs of potential partners
5. Evaluate yourself from your potential partners' perspective
6. Think about financing
7. Consider legal protection for the idea
8. Write a plan
9. Start recruiting a management team
10. Find advisers to poke holes in the concept
11. Decide which kind of partner to talk to first
12. Check out particular partner prospects
13. Determine the criteria for a partner
14. Spill the beans to a potential partner
15. Evaluate other potential partners
16. Figure out whom to contact first at potential partners
17. Wend your way through the corporate structure
19. Impress potential investors
20. Train your partners' employees
21. Solicit suggestions, especially from your partners in their areas of expertise
22. Expect -- and deal with -- problems
23. Sever ties with a partner if you have to
24. Recognize that some things are hard to control
25. Do ongoing training
26. Push interaction with partners down to many staff levels
27. Make sure everyone gets credit
28. Make sure the CEO has time to maintain the relationships