A Strategic Alliance (also see strategic partnership) is an agreement between two or more parties to pursue a set of agreed upon objectives needed while remaining independent organizations.
The alliance is a 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.
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.
Types of strategic alliances include:
- Horizontal strategic alliances, which 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 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, which 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.
- 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.
- 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.
- 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 leads to the fact that the will to compete between these firms is reduced. In addition this makes take-overs by other companies more difficult.
- 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.
Goals of Strategic Alliances
- All-in-one solution
- Acquisition of new customers
- Add strengths, reduce weaknesses
- Access to new markets technologies
- Common sources
- Shared risk
- Shared risk: partnerships allow the companies involved to offset their market exposure. Strategic Alliances probably work best if the companies’ portfolios complement each other, but do not directly compete.
- Shared knowledge: 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 partners’ 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.
- Managing 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 and 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.
- 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.
- Regulatory requirements: When entering a foreign country, organisations sometimes face regulation constraints which can be reduced by forming a strategic alliance with a host-country organization.
- 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 partners, 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.