Broaden Product Offerings
Firms joining a strategic alliance with the main purpose of trying to broaden their product offerings, thus create more and better products (goods and services).
This is usually because individually, each firm may lack resources and capabilities to pursue the identified opportunities. Partnerships can help firms increase their chances of capitalizing on them.
Access New Markets and Customers
Firms can use strategic alliances to get access to new markets or reach new customers. They can also have chances to enter the market a lot faster.
For example, a defense contractor in a country may be required by the foreign governments to either purchase parts or obtain subcontractors in that country. A foreign company plays the role of a parts supplier or a subcontractor, participating in the value chain of the firm.
Strategic alliances can be a means for firms to enter slow-cycle markets. These slow-cycle markets are usually restricted markets in which imitating the existing firms’ competitive advantage is costly or almost impossible due to government regulations. Some of the examples of these markets are railroads, telecommunications, and commodities.
Strategic alliances can also be used to help firms gain rapid entry to fast-cycle markets. This is because forming alliances can give firms quick access to excessive resources and new capabilities. These are the requirement for most firms competing within these fast-cycle markets, as these markets are usually hypercompetitive, unstable, unpredictable, and rather complex.
Strategic alliances can help firms speed up their market entry or maintain their market leadership. In terms of internal operations, strategic alliance can also assist firms in sharing expenses of risky investment such as research and development.
Develop Competitive Advantage
Firms also want to develop new resources and capabilities, which might lead to new core competencies and thus, competitive advantages.
They do this by leveraging, exchanging, and sharing their existing resources while working with their partners, thus enhancing their ability for innovation and complex problem-solving.
This process may also develop additional resources and capabilities. These are the foundation for new core competencies, which lead to new competitive advantage.
Strategic alliances may especially be useful in case the potential capabilities that firms want to learn are based on tacit knowledge or new technology which has not been well understood. For example, a hardware manufacturer and a software company can join forces to develop embedded microprocessors that can perform various functions in an automobile. Thus, one company has skills to develop microprocessors, while the other one brings software engineering skills to the table.
In some situations, the learning objective in the alliance is openly discussed and agreed upon between the partners. This usually happens if there is little chance of future competition. The firms can facilitate the process of learning by having a compatible organizational culture and mutual governance structure.
Create Economies of Scale
Firms may use strategic alliances to achieve economies of scale, which is a cost advantage in which firms share their high fixed costs from the development of new products or services.
For example, two technology companies can establish a partnership to share their high fixed costs associated with a capital-intensive operation that manufactures microprocessors.
Mitigate Business Risks
Firms sometimes use strategic alliances as a means to protect themselves from risk and uncertainty.
These risks and uncertainty can be financial, political, or operational. They may come from fast-moving markets or new markets within emerging countries.
For example, there can be insufficient industry capacity among car battery manufacturers to meet the current demand. This would create uncertainty for the firms. To hedge against the risk, firms form alliances with other companies to contract for more batteries. Thus, this strategic move reduces uncertainty with respect to components of products.
Occasionally, firms would form strategic alliances to mitigate the risk that may underline their business objectives. For example, manufacturers often collaborate with suppliers to ensure that new products can fit with new operations. Sometimes, if the products from suppliers are critical to the operation of manufacturers, the manufacturers may form strategic alliances with at least two suppliers to mitigate the supply chain risk.
Initiate Competitive Actions or Responses
Firms can use strategic alliances to initiate a competitive action or response to a competitive attack.
The partnership can be used at either strategic or tactical level. However, due to the costs and risks that the alliances may produce, they are better utilized at strategic level. The decision, then, might be expensive to operate and difficult to reverse.
For example, two firms may form a strategic alliance in response to the partnership formed between two other firms operating within the same industry. The new collaboration may result in significant cost reductions and greater economies of scale.
Sometimes, firms can bring competitive parity to a secondary segment of a market in which firms are competing by using strategic alliances. For example, a firm competing in the high price range of a market may leave it vulnerable to the low-price segment. The firm then can establish a strategic alliance with another firm with capabilities to operate in the low-price range of the market. This can help seal off competitive threats in that market segment.
Resources
Further Reading
Related Concepts
References
- Hitt, M. A., Ireland, D. R., & Hoskisson, R. E. (2016). Strategic Management: Concepts: Competitiveness and Globalization (12th ed.). Cengage Learning.
- Hill, C. W. L., & Jones, G. R. (2011). Essentials of Strategic Management (Available Titles CourseMate) (3rd ed.). Cengage Learning.
- Wheelen, T. L. (2021). Strategic Management and Business Policy: Toward Global Sustainability 13th (thirteenth) edition Text Only. Prentice-Hall.