1. Definition of Strategic Alliance
A strategic alliance (strategic partnership) is an agreement between two or more independent firms or business units to jointly achieve their mutual business goals and objectives.
The partners in a strategic alliance may be actual or potential rivals, direct or indirect competitors, or are situated at different stages of the supply chain.
Some strategic alliances are meant to be short-term agreements, while others may eventually become long-term or permanent relationships.
2. Strategic Alliance Strategy
A strategic alliance strategy is a cooperative strategy in which firms enter a strategic alliance.
Alliance strategy is a part of business strategy or corporate strategy, depending on its scope. Firms use alliance strategy to address strategic gaps that either business strategy or corporate strategy does not yet cover.
Formulating a strategic alliance strategy is the first phase of a strategic alliance lifecycle.
A strategic alliance strategy is an instrument to combine cooperation and competition in a corporate strategy. There are several situations in which the use of strategic alliance strategy makes the most sense to firms.
First, firms are not ready for competition yet, thus they formulate a strategic alliance strategy as a means to cooperate with competitors for short-term objectives. Once they have built up their core competencies, they terminate the alliance and start the competition race.
Secondly, firms may run different businesses and use them to cooperate and compete at the same time. In such a situation, a strategic alliance strategy serves the corporate objective of discovering and strengthening the weaknesses of the businesses.
Lastly, firms may use a strategic alliance strategy as a means to cooperate among themselves and compete with others. This is among the most common ways to apply a strategic alliance strategy.
3. Examples of Strategic Alliances
Originally, strategic alliances are common in the biotechnology industry, where large corporations sponsor research and development activities at small startup firms. While large firms have sales, marketing, and distribution resources, the latter brings expertise and proprietary knowledge to the table.
Another example, a large agriculture firm and another small research-focused agricultural biotechnology company join a strategic alliance and sign agreements to conduct research on the large firms’ behalf. Thus, the alliance helps finance one firm, and build market recognition for the other.
Two firm forms a strategic alliance to collaborate at both the product development stage and the sales stage. They do this by leveraging their client relationship and distribution networks. This creates a new competitive advantage for both firms to outperform their rivals.
4. Challenges of Strategic Alliance
- Firms do not establish a clear alliance strategy as part of their business and/or corporate strategy. This will lead to vague direction and underperformance.
- Firms do not have a joint alliance strategy with their partners. This will lead to firms following others that have a stronger direction and may not receive their fair shares.
- Firms spend more time and effort on the financial aspect of the alliance than they would do on strategy and implementation. This will compromise the final success of the alliance.
- Firms lose commitment and stop supporting alliances. This may happen at either the initiation stage or any stages during the life cycle of the alliance.
- Firms proceed on alliances without evaluating them using realistic or meaningful metrics and criteria. Without evaluation, firms could not assess the effectiveness and efficiency of the alliances.
- Firms lose track of partnerships with partners because of ineffective management. This happens because there can be many different ongoing partnerships between two firms.
- Firms do not manage alliances effectively, which leads to leaking confidential and proprietary knowledge.
5. Successful Strategic Alliances (How Not to Fail)
The social network theory focuses on the configuration of alliance portfolio in terms of its size and structure as one of the main reasons determining the level of value firms can generate from their strategic alliance.
The transaction cost theory suggests that alliance success depends a lot on the choice of its governance structure.
The social exchange theory instead proposes that trust and commitment play a critical role in facilitating a healthy strategic alliance.
The resource-based view emphasizes the importance of complementary resources between the firms in ensuring the success of a strategic alliance.
In general,
- Firms should create an alliance strategy before establishing any strategic alliance. This can help firms establish a general direction in doing business with allies.
- Firms should be strategically aligned with their partners. To do this, firms need to form a joint strategy with their partners.
- Firms should ensure that their organizational cultures are compatible with one another. This is an important condition to support strategic alliances.
- Firms should place more emphasis on establishing and maintaining a good relationship with their partners than strictly following alliance agreements.
- Firms should initiate an implementation plan before signing the agreements. This can help firms realize unanticipated gaps.
- Firms should behave cooperatively throughout the lifecycle of the alliance. They can do this by being ethical and trustworthy.
Specifically, the partners manage trustworthiness by looking at the following fundamental issues: (1) initial conditions of the relationship, (2) negotiation of the contract, (3) interactions between partners, and (4) external events. Any problems with these activities, when happen, would negatively damage the mutual trust between partners.
Trust may also be influenced by the cultures, norms, legal processes, politics, and economic factors involved in the alliance, as in the case of international strategic alliances.
6. Levels of Strategic Alliance
Based on social network theory, a strategic alliance has 3 following levels: (1) dyadic, (2) portfolio, and (3) network.
A strategic alliance dyadic is a direct alliance between 2 firms: the focal firm and its partner.
A strategic alliance portfolio is a collection of direct alliances between the focal firm and its partners. This alliance portfolio can be perceived as many separate dyadic alliances.
A strategic alliance network consists of direct alliance (between the focal firms and its alliance partners) and indirect ties (partners of partners). This network can be seen as an alliance portfolio with extended connections to firms working with the focal firms’ partners.
The reason for this classification of levels is that there is usually a significant difference in terms of alliance performance amongst companies. While some companies enjoy a high level of performance, other firms may struggle to even earn average returns. Looking at the management of alliances from these 3 different levels can help firms to get the most benefits out of their alliance deals.
7. Alliance Type: Joint Venture (Joint Alliance)
7.1. Definition of Joint Venture
A joint venture (joint alliance) is a type of strategic alliance in which firms jointly create a legally independent company.
In general, partners in a joint venture share an equal equity percentage and contribution to management and operations.
7.2. Examples
Two automobile manufacturers form a joint venture to develop new cars that aim specifically at a geographic market. The product would be differentiated by applying green technologies.
Each partner owns 50% of the mutual company.
7.3. Purpose, Goals, and Objectives of Joint Venture
Firms may need to form a joint venture to combine their resources to create competitive advantage. To do this, a joint venture can help firms establish relationships and transfer tacit knowledge. Tacit knowledge is very important to firms’ efforts to develop competitive advantage. It is mainly acquired through experience and insight.
A joint venture also assists firms in transferring capabilities and knowledge, especially tacit knowledge, to one another. To do this, firms rely on inter-organizational collaboration.
A joint venture also helps firms establish a long-term relationship with the other partners when the firms cannot or do not want to merge permanently.
A joint venture can also support firms to pursue opportunities in the external environment. These opportunities are usually too complex, uneconomical, or risky for a single firm.
7.4. Risks of Joint Venture
The first risk of a joint venture is that operational managers who join and collaborate day-to-day operations do not involve in the forming or shaping of the venture.
The second risk of a joint venture is that over time, the venture may not be equally committed and supported by the firms.
8. Alliance Type: Equity Strategic
An equity strategic alliance is a type of strategic alliance in which firms own minority equity of the other firms.
Some of the purposes of firms when forming equity strategic partnership is to (1) create competitive advantage, (2) reform business strategy, and (3) spin-off part of the business.
9. Alliance Type: Non-Equity Strategic
A non-equity strategic alliance is a type of strategic alliance in which firms develop a contractual relationship with one another.
A non-equity strategic alliance is usually less formal, demands fewer commitments than do joint ventures and equity strategic alliances. This partnership generally does not foster relationship intimacy between firms.
10. Alliance Type: Vertical Strategic
A vertical (complementary) strategic alliance is a type of strategic alliance in which firms share some of their resources and capabilities from different stages of the supply chain.
This type of strategic alliance focuses on creating competitive advantage for the firms joining the partnership.
Vertical strategic alliances also help firms adapt to environmental changes and proceeding innovation during adaptation.
11. Alliance Type: Horizontal Strategic
A horizontal (complementary) strategic alliance is a type of strategic alliance in which firms share some of their resources and capabilities from the same stages of the supply chain.
This type of strategic alliance can help firms sustaining their current competitive advantage while creating a new competitive advantage. To do this with horizontal strategic alliances, firms usually focus on long-term product development and distribution opportunities.
12. Alliance Type: Synergistic Strategic
A synergistic strategic alliance is a type of strategic alliance in which firms share their resources and capabilities to create economics of scope.
This type of partnership focuses on creating economics of scope. It does this by developing synergy across multiple functions or businesses between the partners.
Resources
Further Reading
- Strategic Alliance (investopedia.com)
- Four Steps to Powerful Strategic Alliances (businessadvance.com)
- Strategic Alliance Examples [and What you Can Learn From Them] (referralrock.com)
- Strategic Alliances for Competitive Advantage (deloitte.wsj.com)
- How to Achieve Growth Through Strategic Alliances (visionedgemarketing.com)
- Understanding the Benefits and Challenges of Strategic Alliances (franchise.org)
- The Five Factors of a Strategic Alliance (iveybusinessjournal.com)
- Joint Ventures and Strategic Alliances (referenceforbusiness.com)
- Strategic Alliance: What is it, Types, Benefits & Why You Need it (workspan.com)
Even More Reading
- Strategic Alliance Strategy (iedunote.com)
- Eight Principles For Managing Strategic Alliances (informationweek.com)
- What are strategic alliances? (entrepreneur.com)
- Strategic Partnerships(imd.org)
- Strategic Alliances (corporatefinanceinstitute.com)
- Partnerships 101: What Is a Strategic Alliance, and Why Do I Need One? (crossbeam.com)
- Is a Joint Venture the Right Strategy for Your Business? (caplinked.com)
- Strategic Alliances: Fact-Based Decisions Help Build Consensus and Lower Risk (definitiveinc.com)
Even More Reading
- Strategic Alliance Building: A Portfolio-Based Approach (ewellandassoc.com)
- Strategic Alliance (cio-wiki.org)
- Developing Strategic Alliances – What’s in It For Me? (rigsbee.com)
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.
- Hill, C. W. L., & Jones, G. R. (2011). Essentials of Strategic Management (Available Titles CourseMate) (3rd ed.). Cengage Learning.