What is a Non-Equity Strategic Alliance?
A non-equity strategic alliance (mutual service consortium) is a strategic alliance in which two or more firms develop a collaborative relationship to share some of their resources and expertise.
Non-equity partners do not become owners of the firm they invest in, do not have full voting rights, and are not expected to contribute capital.
In this type of alliance, firms do not establish an independent company (joint venture) and do not take equity positions (equity strategic alliance). This also means that non-equity strategic alliances are less collaborative and demand fewer commitments.
Why Do Non-Equity Strategic Alliances Exist?
The first reason firms form this type of strategic alliance is to focus on the creation of new competitive advantage.
Most firms would lack a full set of assets and capabilities needed to pursue all opportunities. Partnering with others might increase the probability of firms reaching their goals and specific objectives.
Firms can contractually cooperate to reach new customers, broaden product offerings, or better distribute their products without having additional cost structures.
The second reason firms form non-equity strategic alliances is because they can start to strengthen existing value propositions, create new value propositions they could not generate before by acting independently or to cater to more potential customers. These are greatly beneficial to all customers.
The Dominant Type of Strategic Alliances
Non-equity strategic alliances make up the majority of strategic alliances (purely contractual agreements where no equity structure is created.)
This is especially true in industries like software, electronics, financial services, and retail.
Non-equity partnership being a dominant type of strategic alliances is mainly due to some of the following reasons:
- Companies can structure a collection of single non-equity alliances as an ecosystem. This system may help firms assembling complementary and overlapping partnerships to form unique business models.
- Companies operating in these fast-moving industries require a quick way to access markets without the time, rigidity, and other issues associated with creating a joint venture, or equity alliance.
- Companies can take advantage of each other’s core competencies and lower their financial risks because of the low level of investment.
Cooperative Moves of Non-Equity Strategic Alliances
This type of strategic alliance consists of the following cooperative moves: (1) outsourcing arrangements, (2) licensing agreements, (3) distribution agreements, and (4) supply contracts.
Firms select outsourcing arrangements as a means to outsource their activities because of the cost efficiencies that can be generated through scale economies. The outsourced firm may have an ecosystem of firms that supply it with resources to manufacture required products. This ecosystem creates a competitive advantage that is difficult for competitors to imitate.
Firms typically use licensing agreements to enter a restricted market or to establish a franchise in a new market. The franchisor and the franchisees enter a contractual relationship in which a firm licenses its trademark and method of doing business to another firm in exchange for a fee. Licensing is especially useful if the trademark or brand name of the franchisor is popular, but they cannot afford to enter the market (usually in a foreign country) directly. The franchisor does not take an equity position hence the term non-equity partnership.
Limitations of Non-Equity Strategic Alliances
The first limitation of this type of alliance is that the low level of intimacy may make it less suitable for complex projects.
This is because complex projects usually require partners to effectively transfer tacit knowledge, along with strategic resources and capabilities, to each other. Non-equity alliances foster a less collaborative relationship, rather a contractual one.
The second limitation of non-equity strategic alliances is that it is difficult to ensure alignment on goals and objectives and coordinate interactions between partners to get them aligned via mutual economic outcomes.
This is also mainly due to the limitations of the contractual relationship.
The third limitation of non-equity strategic alliances is that it is challenging to quantify the relative share of knowledge and technology and each partner may contribute to the alliance.
This scenario makes it difficult to write a specific contract stating not only the exact contribution but also the final profits for each partner.
An incomplete contract may have many consequences.
The fourth limitation of non-equity strategic alliances is that firms joining the alliance may have differential bargaining power.
Thus, the dominant firm may be able to lower its investment, contribute less to technical know-how, or acquire a greater share of the final profits. This problem would negatively affect both the formation and operation of a non-equity strategic partnership.
Resources
Further Reading
- Strategic Alliances: Learn All About Them (pemmypaper.com)
- Alliance Best Practices: Getting Non-Equity Collaboration Right (waterstreetpartners.net)
Related Concepts
References
- Hitt, M. A., Ireland, D. R., & Hoskisson, R. E. (2016). Strategic Management: Concepts: Competitiveness and Globalization (12th ed.). Cengage Learning.
- Hitt, M. A., Ireland, D. R., & Hoskisson, R. E. (2019). Strategic Management: Concepts and Cases: Competitiveness and Globalization (MindTap Course List) (13th ed.). Cengage Learning.
- When is Equity More than Just Financing? Evidence from Strategic Alliances. (2021b).