Strategic alliances are agreements between two or more independent companies to cooperate in manufacturing, developing, or selling products and services or other business objectives.
For example, in a strategic alliance, Company A and Company B combine their respective resources, capabilities, and core competencies to generate mutual interests in designing, manufacturing, or distributing goods or services.
5 Key Components of Strategic Alliances
A successful strategic alliance:
- It is critical to the success of a core business goal or objective.
- It is critical to develop or maintaining a core competency or other source of competitive advantage.
- Blocks a competitive threat.
- Creates or maintains strategic choices for the firm.
- It mitigates a significant risk to the business.
If these things exist in the partnership, both organizations benefit from a symbiotic relationship that drives the business forward, staves off competition and threats, and establishes leadership in the marketplace.
As more and more businesses build their partner ecosystems, companies that do not actively build and maintain these relationships will flounder on their own, without the tools to be competitive in a global market.
Types of Strategic Alliances
There are three types of strategic alliances: Joint Venture, Equity Strategic Alliance, and Non-equity Strategic Alliance.
1. Joint Venture
A joint venture is established when the parent companies establish a new child company. For example, Company A and Company B (parent companies) can form a joint venture by creating Company C (child company).
In addition, if Company A and Company B each own 50% of the child company, it is defined as a 50-50 Joint Venture. If Company A owns 70% and Company B owns 30%, the joint venture is classified as a Majority-owned Venture.
2. Equity Strategic Alliance
An equity strategic alliance is created when one company purchases a certain equity percentage of the other company. If Company A purchases 40% of the equity in Company B, an equity strategic alliance would be formed.
3. Non-equity Strategic Alliance
A non-equity strategic alliance is created when two or more companies sign a contractual relationship to pool their resources and capabilities together.
Reasons for Strategic Alliances
To understand the reasons for strategic alliances, let us consider three different product life cycles: Slow cycle, Standard cycle, and Fast cycle. The product life cycle is determined by the need to innovate and continually create new products in an industry.
For example, the pharmaceutical industry operates a slow product lifecycle, while the software industry operates in a fast product lifecycle. For companies whose product falls in a different product lifecycle, the reasons for strategic alliances are different:
1. Slow Cycle
In a slow cycle, a company’s competitive advantages are shielded for relatively long periods of time. The pharmaceutical industry operates in a slow product life cycle as the products are not developed yearly and patents last a long time.
Strategic alliances are formed to gain access to a restricted market, maintain market stability (setting product standards), and establish a franchise in a new market.
2. Standard Cycle
In a standard cycle, the company launches a new product every few years and may or may not be able to maintain its leading position in an industry.
Strategic alliances are formed to gain market share, try to push out other companies, pool resources for large capital projects, establish economies of scale, or gain access to complementary resources.
3. Fast Cycle
In a fast cycle, the company’s competitive advantages are not protected and companies operating in a fast product lifecycle need to constantly develop new products/services to survive.
Strategic alliances are formed to speed up the development of new goods or services, share R&D expenses, streamline market penetration, and overcome uncertainty.
Value Creation in Strategic Alliances
Strategic alliances create value by:
- Improving current operations
- Changing the competitive environment
- Ease of entry and exit
Current operations are improved due to:
- Economies of scale from successful strategic alliances
- The ability to learn from the other partner(s)
- Risk and cost being shared between partner(s)
Changing the competitive environment through:
- Creating technology standards (for example, Sony and Panasonic announce to work together to produce a new-generation TV). This would help set a new standard in a competitive environment.
Easing entry and exit of companies through:
- A low-cost entry into new industries (a company can form a strategic partnership to easily enter into a new industry).
- A low-cost exit from industries (A new entrant can form a strategic alliance with a company already in the industry and slowly take over that company, allowing the company that is already in the industry to exit).
Challenges in Strategic Alliances
Although strategic alliances create value, there are many challenges to consider:
- Partners may misrepresent what they bring to the table (lie about competencies that they do not have).
- Partners may fail to commit resources and capabilities to the other partners.
- One partner may commit heavily to the alliance while the other partner does not.
- Partners may fail to use their complementary resources effectively.
Advantages and Disadvantages of Strategic Alliances
Advantages of strategic alliances
- Sharing resources and expertise. A strategic alliance should combine the best both companies have to offer. This can be a deeper understanding of the product, sales, or marketing knowledge, or even just more hands on deck to increase speed to market.
- New-market penetration. In some cases, a strategic alliance gives access to new markets with a solution that wouldn’t have been possible for either company on their own. For instance, companies going global often work with a trusted local partner to get an advantage in an emerging market.
- Expanded production. When it comes to manufacturing and distributing products, strategic alliances allow partners to increase their capabilities and scale quickly to meet demand.
- Drive innovation. With the right alliance, partners can outpace the competition with new solutions that are a complete package for their customers. These alliances are creative and revolutionary and change the market landscape in a dramatic way.
Strategic alliances allow partners to scale quickly, build innovative solutions for their customers, enter new markets, and pool valuable expertise and resources. And, in a business environment that values speed and innovation, this is a game-changer.
Disadvantages of Strategic Alliances
- Loss of control. In an alliance, both organizations must cede some control over how their business is run and perceived. A strategic alliance requires honesty and transparency, but that trust isn’t built overnight. Without significant buy-in from both parties, an alliance may suffer.
- Increased liability. In a joint venture or equity strategic alliance, both companies are on the hook for the outcome. If something happens to stall production or create unhappy customers, both partners are at risk for the loss in reputation.
For instance, in the case of Tesla and Panasonic, what was originally an advantageous relationship became fraught when batteries weren’t produced and shipped quickly enough, causing delays in Tesla vehicle production and shipments. Reports now say that Tesla is putting its capital behind building its own battery technology to reduce dependence on Panasonic.
1. What do you understand by strategic alliance?
A strategic alliance is an arrangement between two companies that have decided to share resources to undertake a specific, mutually beneficial project. Strategic alliances allow two organizations, individuals or other entities to work toward common or correlating goals.
2. What is the importance of strategic alliances?
Strategic alliances allow an organization to reach a broader audience without putting in extra time and capital. A franchise business is constantly searching for new, creative ways to increase its clientele and reach new potential customers, and forming a strategic alliance provides an opportunity to do that.
3. How does strategic alliances create value?
Customers derive value from strategic alliances by having the convenience of a full-service one-stop shop. Customers gain access to specialized skills and knowledge at a fraction of the market rate. They also benefit in other ways, such as alliance partners’ cross-promotion and referrals.
4. What are the benefits of an alliance system?
When managed carefully, alliances contribute to regional and global stability (and therefore allow prosperity to be maximized). They deter aggression, provide some predictability and restrain allies from destabilizing postures.