Meaning of Strategic Alliance
Strategic alliances happen when two or more businesses work together to create a win-win situation. For example, Company A and Company B may decide to combine their distribution facilities so they can share mutual resources and cut the costs associated with shipping.
You can form a strategic alliance with any company and for any reason. Often, businesses seek out strategic alliances in the areas of design, product development, manufacturing, distribution or the sale of goods and services, but you can enter into an alliance to further any business objective.
Some Strategic Alliance Examples
To give you an idea of the scope and breadth of strategic alliances, here are some examples:
- An adhesives manufacturer forms a strategic alliance with a research laboratory to develop a next-generation adhesive that runs clean on production lines.
- A commercial design company forms a strategic alliance with a digital marketing agency to improve its marketing efforts.
- A clothing retailer forms a strategic alliance with a single manufacturer to ensure consistent sizing and quality.
- A commercial maintenance company partners with a commercial real estate agent to write a regular column in the real estate agent’s newsletter, adding value to readership and expanding the maintenance company’s marketing reach.
- A coffee shop partners with a bookstore so people can browse the latest bestsellers and take a coffee break all in one go, thus expanding the customer base for both partners. This alliance actually happened between Starbucks and Barnes & Noble, and has stood the test of time.
Various types of strategic alliances include:
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 high-tech markets are typical Horizontal Alliances. Raue & Wieland (2015) describe the example of horizontal alliances between logistics service providers. 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.
Vertical strategic alliances-
It describe the collaboration between a company and its upstream and downstream partners in the Supply Chain, that means a partnership between a company 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.
These 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.
In this 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.
These 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 leads to the fact that the will to competition between these firms is reduced. In addition this makes take-overs by other companies more difficult.
Non-equity strategic alliances-
It covers 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.
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-
These 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-
It is 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 this 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-
It connects 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:
Cartels Big companies can cooperate unofficially, to control production and/or prices within a certain market segment or business area and constrain their competition
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.
A company pays for the right to use another companies technology or production processes.
Industry standard groups:
These are groups of normally large enterprises, that try to enforce technical standards according to their own production processes.
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.
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.
For companies there are many reasons to enter a strategic alliance:
The partnerships allow the involved companies to offset their market exposure. Strategic Alliances probably work best if the companies’ portfolio complement each other, but do not directly compete.
Sharing skills (distribution, marketing, 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.
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.
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.
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 enable 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.
Economics 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.
Disadvantages of strategic alliances include:
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.
Focusing and committing is necessary to run a Strategic Alliance successfully but might discourage from taking other opportunities, which might be beneficial as well.
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.
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.
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