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GCSA/U4 Topic 1 Value Creation through Alliances

One of the fastest growing trends for business today is the increasing number of strategic alliances. According to Booz-Allen & Hamilton, strategic alliances are sweeping through nearly every industry and are becoming an essential driver of superior growth. Alliances range in scope from an informal business relationship based on a simple contract to a joint venture agreement in which for legal and tax purposes either a corporation or partnership is set up to manage the alliance.

For small businesses, strategic alliances are a way to work together with others towards a common goal while not losing their individuality. Alliances are a way of reaping the rewards of team effort – and the gains from forming strategic alliances appear to be substantial. Companies participating in alliances report that at much as 18 percent of their revenues comes from their alliances.

But it isn’t just profit that is motivating this increase in alliances. Other factors include an increasing intensity of competition, a growing need to operate on a global scale, a fast changing marketplace, and industry convergence in many markets (for example, in the financial services industry, banks, investment firms, and insurance companies are overlapping more and more in the products they supply). Especially in a time when growing international marketing is becoming the norm, these partnerships can leverage your growth through alliances with international partners. Rather than take on the risk and expense that international expansion can demand, one can enter international markets by finding an appropriate alliance with a business operating in the marketplace you desire to enter.

A strategic alliance is essentially a partnership in which you combine efforts in projects ranging from getting a better price for supplies by buying in bulk together to building a product together with each of you providing part of its production. The goal of alliances is to minimize risk while maximizing your leverage and profit. Alliances are often confused with mergers, acquisitions, and outsourcing. While there are similarities in the circumstances in which a business might consider one these solutions, they are far from the same. Mergers and acquisitions are permanent, structural changes in how the company exists. Outsourcing is simply a way of purchasing a functional service for the company.

An alliance is simply a business-to-business collaboration. Another term that is frequently used in conjunction with alliances is establishing a business network. Alliances are formed for joint marketing, joint sales or distribution, joint production, design collaboration, technology licensing, and research and development. Relationships can be vertical between a vendor and a customer, horizontal between vendors, local, or global. Alliances often are established formally in a joint venture or partnership.

Businesses use strategic alliances to:

  • achieve advantages of scale, scope and speed
  • increase market penetration
  • enhance competitiveness in domestic and/or global markets
  • enhance product development
  • develop new business opportunities through new products and services
  • expand market development
  • increase exports
  • diversify
  • create new businesses
  • Reduce costs.

Strategic alliances are becoming a more and more common tool for expanding the reach of your company without committing yourself to expensive internal expansions beyond your core business.

There are four types of strategic alliances: joint venture, equity strategic alliance, non-equity strategic alliance, and global strategic alliances.

  • Joint venture is a strategic alliance in which two or more firms create a legally independent company to share some of their resources and capabilities to develop a competitive advantage.
  • Equity strategic alliance is an alliance in which two or more firms own different percentages of the company they have formed by combining some of their resources and capabilities to create a competitive advantage.
  • Non-equity strategic alliance is an alliance in which two or more firms develop a contractual-relationship to share some of their unique resources and capabilities to create a competitive advantage.
  • Global Strategic Alliances working partnerships between companies (often more than two) across national boundaries and increasingly across industries, sometimes formed between company and a foreign government, or among companies and governments.

Advantages:

A business strategic alliance is also a means to an end, not just an end in itself. Strategic alliances often take place between firms of different industries and of varied sizes, for vertical or horizontal links, consolidation of positions or any of the following:

  1. Gain a means of distribution in International market- it may be beneficial for an exporter to ally with local partner, to understand the functioning and the local market network.
  2. Overcome legal or regulatory barriers- in some countries it is mandatory to have local partner in order to conduct business. Thus, alliances offer suitable options.
  3. Diversification- it may be advantageous to enter into an alliance as a business guide to minimize pitfalls in a new business territory.
  4. Avoiding competition- an alliance may be entered into with a market leader or a major competitor to avoid competition.
  5. Focus on new products and restructuring: an alliance in the form of a research and development alliance may focus at the development of new products. Apart from this, an alliance may also enable the firm to adapt to a more effective organizational structure.
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