A strategic alliance is an agreement between two or more parties to pursue a set of agreed upon objectives needed while remaining independent organizations. A strategic alliance will usually fall short of a legal partnership entity, agency, or corporate affiliate relationship. Typically, two companies form a strategic alliance when each possesses one or more business assets or have expertise that will help the other by enhancing their businesses. Strategic alliances can develop in outsourcing relationships where the parties desire to achieve long-term win- win benefits and innovation based on mutually desired outcomes.
This form of cooperation lies between mergers and acquisitions and organic growth. Strategic alliances occur when two or more organizations join together to pursue mutual benefits.
Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property. The alliance is the cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance often involves technology transfer (access to knowledge and expertise), economic specialization, shared expenses and shared risk.
Types of strategic alliances
Some types of strategic alliances include:
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Horizontal strategic alliances-
These are formed by firms that are active in the same business area. That means that the partners in the alliance used to be competitors and work together In order to improve their position in the market and improve market power compared to other competitors. Research & Development collaborations of enterprises in tech markets are typical Horizontal Alliances. Raue & Wieland (2015) describe the example of horizontal alliances between logistics service providers. [12] They argue that such companies can benefit twofold from such an alliance. On the one hand, they can “access tangible resources which are directly exploitable”. This includes extending common transportation networks, their warehouse infrastructure and the ability to provide more complex service packages by combining resources. On the other hand, they can “access intangible resources, which are not directly exploitable”. This includes know-how and information and, in turn, innovativeness.
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Vertical strategic alliances,
which describe the collaboration between a company and its upstream and downstream partners in the Supply Chain, that means a partnership between a companies, its suppliers and distributors. Vertical Alliances aim at intensifying and improving these relationships and to enlarge the company’s network to be able to offer lower prices. Especially suppliers get involved in product design and distribution decisions. An example would be the close relation between car manufacturers and their suppliers.
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Intersectional alliances
are partnerships where the involved firms are neither connected by a vertical chain, nor work in the same business area, which means that they normally would not get in touch with each other and have totally different markets and know-how.
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Joint ventures,
in which two or more companies decide to form a new company. This new company is then a separate legal entity. The forming companies invest equity and resources in general, like know-how. These new firms can be formed for a finite time, like for a certain project or for a lasting long-term business relationship, while control, revenues and risks are shared according to their capital contribution.
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Equity alliances
which are formed when one company acquires equity stake of another company and vice versa. These shareholdings make the company stakeholders and shareholders of each other. The acquired share of a company is a minor equity share, so that decision power remains at the respective companies. This is also called cross- shareholding and leads to complex network structures, especially when several companies are involved. Companies which are connected this way share profits and common goals, which lead to the fact that the will to competition between these firms is reduced. In addition this makes take- overs by other companies more difficult.
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Non-equity strategic alliances
which cover a wide field of possible cooperation between companies. This can range from close relations between customer and supplier, to outsourcing of certain corporate tasks or licensing, to vast networks in R&D. This cooperation can either be an informal alliance which is not contractually designated, which appears mostly among smaller enterprises, or the alliance can be set by a contract.
Types of Strategic Alliances
Michael Porter and Mark Fuller, founding members of the Monitor Group (now Monitor Deloitte), draw a distinction among types of strategic alliances according to their purposes:
- Technology development alliances, which are alliances with the purpose of improvement in technology and know-how, for example consolidated Research & Development departments, agreements about simultaneous engineering, technology commercialization agreements as well as licensing or joint development agreements.
- Operations and logistics alliances where partners either share the costs of implementing new manufacturing or production facilities, or utilize already existing infrastructure in foreign countries owned by a local company.
- Marketing, sales and service strategic alliances, in which companies take advantage of the existing marketing and distribution infrastructure of another enterprise in a foreign market to distribute its own products to provide easier access to these markets.
- Multiple activity alliance, which connect several of the described types of alliances. Marketing alliances most often operate as single country alliances, international enterprises use several alliances in each country and technology and development alliances are usually multi-country alliances. These different types and characters can be combined in a multiple activity alliance.
Further kinds of strategic alliances include:
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Cartels:
Big companies can cooperate unofficially, to control production and/or prices within a certain market segment or business area and constrain their competition
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Franchising-
a franchiser gives the right to use a brand-name and corporate concept to a franchisee who has to pay a fixed amount of money. The franchiser keeps the control over pricing, marketing and corporate decisions in general.
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Licensing:
A company pays for the right to use another companies technology or production processes.
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Industry standard groups:
These are groups of normally large enterprises, that try to enforce technical standards according to their own production processes.
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Outsourcing:
Production steps that do not belong to the core competencies of a firm are likely to be outsourced, which means that another company is paid to accomplish these tasks.
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Affiliate marketing:
a web-based distribution method where one partner provides the possibility of selling products via its sales channels in exchange of a beforehand defined provision.
Goals of strategic alliances
- All-in-one solution
- Flexibility
- Acquisition of new customers
- Add strengths, reduce weaknesses
- Access to new markets-technologies
- Common sources
- Shared risk
Advantages and Disadvantages of strategic alliances
Advantages:
For companies there are many reasons to enter a strategic alliance:
- Shared risk: The partnerships allow the involved companies to offset their market exposure. Strategic Alliances probably work best if the company’s portfolio complement each other, but do not directly compete.
- Shared knowledge: Sharing skills (distribution, marketing, and management), brands, market knowledge, technical know-how and assets leads to synergistic effects, which result in pool of resources which is more valuable than the separated single resources in the particular company.
- Opportunities for growth: Using the partner’s distribution networks in combination with taking advantage of a good brand image can help a company to grow faster than it would on its own. The organic growth of a company might often not be sufficient enough to satisfy the strategic requirements of a company that means that a firm often cannot grow and extend itself fast enough without expertise and support from partners.
- Speed to market: Speed to market is an essential success factor In nowadays competitive markets and the right partner can help to distinctly improve this.
- Complexity: As complexity increases, it is more and more difficult to manage all requirements and challenges a company has to face, so pooling of expertise and knowledge can help to best serve customers.
- Innovation: The parties in an alliance can jointly determine their mutual desired outcomes and craft a collaborative contract that features incentives designed to spur investments in innovation.
- Costs: Partnerships can help to lower costs, especially in non- profit areas like research & development.
- Access to resources: Partners in a Strategic Alliance can help each other by giving access to resources, (personnel, finances, technology) which enables the partner to produce its products in a higher quality or more cost efficient way.
- Access to target markets: Sometimes, collaboration with a local partner is the only way to enter a specific market. Especially developing countries want to avoid that their resources are exploited, which makes it hard for foreign companies to enter these markets alone.
- Economies of scale: When companies pool their resources and enable each other to access manufacturing capabilities, economies of scale can be achieved. Cooperating with appropriate strategies also allows smaller enterprises to work together and to compete against large competitors.
Further advantages of strategic alliances
- Access to new technology, intellectual property rights
- Create critical mass, common standards, new businesses
- Diversification
- Improve agility, R&D, material flow, speed to market
- Reduce administrative costs, R&D costs, and cycle time
- Allowing each partner to concentrate on their competitive advantage
- Learning from partners and developing competencies that may be more widely exploited elsewhere
- To reduce political risk while entering into a new market
- An alliance plan will provide the opportunity to manage and achieve defined results from a corporate ecosystem
Disadvantages
Disadvantages of strategic alliances include:
- Sharing: In a strategic alliance the partners must share resources and profits and often skills and know-how. This can be critical if business secrets are included in this knowledge. Agreements can protect these secrets but the partner might not be willing to stick to such an agreement.
- Creating a competitor: The partner in a strategic alliance might become a competitor one day, if it profited enough from the alliance and grew enough to end the partnership and then is able to operate on its own in the same market segment.
- Opportunity costs: Focusing and committing is necessary to run a Strategic Alliance successfully but might discourage from taking other opportunities, which might be beneficial as well.
- Uneven alliances: When the decision powers are distributed unevenly, the weaker partner might be forced to act according to the will of the more powerful partner(s), even if he or she is actually not willing to do so.
- Foreign confiscation: If a company is engaged in a foreign country, there is the risk that the government of this country might try to seize this local business so that the domestic company can have all the market on its own.
- Risk of losing control over proprietary information, especially regarding complex transactions requiring extensive coordination and intensive information sharing.
- Coordination difficulties due to informal cooperation settings and highly costly dispute resolution.
Important links
- Components of Competition Act 2002
- Combination & Competition Act
- The Consumer Protection Act, 1986
- World Trade Organization (WTO)- Features, Structure etc.
- WTO Agreement (World Trade Organization)
- WTO and GATT | Functions & Objectives of WTO
- Advantages & Disadvantages of international trade
- International Trading Environment & its Need
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