What Is a Strategic Alliance
An alliance is a strategic agreement between two or more parties to pursue a mutually-beneficial goal. In business, alliances are used for developing, making, and growing your business. A strategic alliance is a more formal relationship than a partnership and can take many different forms. It involves a more equal sharing of resources and corporate assets, and the responsibility for achieving certain key objectives of the alliance. It is also more complex than a partnership since it requires more detailed planning, greater commitment on the part of each organization involved, and extensive communication between the partners throughout the duration of the alliance. The purpose of an alliance is to achieve mutual benefit through complementary resources that would not be available through individual business endeavors. An example of this could be sharing access to distribution channels or expertise in research and development (R&D). Another example would be an alliance that develops, manufactures, and markets products or services in cooperation with other companies.
An example of a strategic alliance is when Pepsi-Cola Company (P) and Coca-Cola Company (C) agree to develop the soft drink brand, Pepsi Cola. Pepsi would contribute all of its knowledge in the soft drink market, while Coke would contribute its distribution network to help reach more consumers.
Alliances can take many forms; here are some main ones:
Cooperative Alliance: A cooperative alliance is similar to a joint venture (JV), but without majority ownership interest. In a cooperative alliance, all of the partners have a stake in the success of the alliance as well as a defined deliverable. In other words, there is no agreement as to how things will be divided up between the parties involved.
Competitive Alliance: Competitive alliances are formed for business purposes, usually to gain an advantage over another firm or competitor. This can be a strategic move for a company to gain an edge over another firm and save itself from being outmaneuvered by its competitors. Companies often team up with their competitors because they share complementary industries or have complementary needs. It is known as a “joint-venture” when all the parties agree to jointly pursue a specific interest. When the alliance is formed in this way, all of the partners can claim they didn’t set out to compete with one another, but were just in it for the long run. It’s an alliance of convenience.
Cooperative Alliance: A cooperative alliance is a type of strategic alliance where there is no formal agreement between the companies involved about how they will divide up their respective interests in or between their respective businesses and activities in relation to the alliance. The parties to a cooperative alliance set out clear objectives and goals, share risk and reward, agree on the time frame for achieving those goals.
In a joint venture, all of the partners have a stake in the success of the joint venture as well as a defined deliverable. In other words, there is an agreement as to how things will be divided up between the parties involved. These agreements could include: territories; markets; customers; production; research and development (R&D); and other resources such as equipment and expertise.
Advantages from a strategic alliance
A strategic alliance is formed for business purposes, usually to gain an advantage over another firm or competitor. The alliance isn’t formed for sharing resources or other kinds of support, but solely to tackle a particular business challenge or to work toward accomplishing a specific goal. The parties involved in the alliance only work together for as long as they need each other’s resources, knowledge, skills, etc. In any case, the strength of an alliance always relies on the power that each company has.
For example: You are Pepsi international company and your main competitor is Coke international company then you both will form strategic alliances with many small local companies. These local companies are not strong enough to compete with these two giants but by forming alliance with them both of the companies will get strong market shares in many different countries.
Disadvantages from a Strategic Alliance
Strategic alliances are more complex than partnerships since they require more detailed planning and greater commitment and communication between the partners throughout the duration of the alliance. The preparation and negotiation stages must be handled in a very professional manner to ensure consensus and buy-in. Consideration should be taken regarding liabilities, conflicts, confidentiality, decision-making processes, ownership of intellectual property (IP), revenue sharing and other economic issues such as joint venture contracts and exit strategies.
Strategic alliances also require a common language and shared values and culture. This can be a challenge when working with different companies that may share core values and cultures, but don’t necessarily agree on business practices and ways of doing things.
Relationship between strategic allies is not always easy, these partnerships are very complex so you need to consider very carefully before starting this type of business alliance. For example, if you create an alliance with a major company it will expect the guarantee of purchases from another competitor in order to maintain its relationship with its best customer. Thus, the harsh reality is that you will have to make some difficult decisions about your strategic alliances or you will find yourself losing on all fronts.
To ensure that strategic alliances are successful, it’s important to have an internal team that is committed to maintain the partnership, and that works with the customer also have a plan of action to follow if things start to go wrong.
Strategic alliances can provide a business with a number of benefits, for example: it can allow you to expand your international network without having to invest in property or equipment; make access to new technology or offer different products or services; share costs of R&D and advertising; provide complementary strengths and skills within the business.
In order for a strategic alliance to be successful there must be clear relationships between what is being done, by whom and how success will be measured. A relationship between parties is defined as the “interaction of human beings” and “the influence of one mind or group upon another.” In a strategic alliance it is important to make sure that the relationship between the two business partners is defined.
In order for a strategic alliance to work, there must be clear communication among the various business unit leaders on what they plan on doing, who will be responsible for each task and how success will be measured. There must also be an agreement as to how many people within each company will do what.
A different perspective can be gained by considering all of these issues in conjunction with two very different companies that were looking for some additional sales force power in their marketplace. Each company had its own perspective, its own way of doing business and its own agenda. Their alliance was an example of how partners with the same goals, but different perspective can work together to form a very strong partnership.
Strategic alliances are formed in an effort to create economic benefits that otherwise would not be realized individually. These alliances may be formed by firms in order to increase market share, increase product variety or enhance R&D. However they are also commonly formed in order to improve balance sheet strength or meet working capital needs. The underlying factor in a strategic alliance is what each party seeks to gain. Whether it’s in the form of larger market share, R&D abilities, larger balance sheet, new market etc, each party expects to receive some benefit in return. To embark on a Strategic Alliance therefore, firm’s should be certain of what they will gain in return and not just enter into an alliance until they are certain of the benefits. Fintalent’s Strategic Advisory Experts and M&A Consultants can help firms decide on what Strategic Alliance would be beneficial and navigate potential pitfalls when negotiating such deals.