Definition of Vertical Strategic Alliance
A vertical strategic alliance (a.k.a vertical complementary strategic alliance) is a voluntary strategic partnership in which firms share certain types of resources and capabilities from different parts of the supply chain (not to confuse with the value chain.)
Vertical alliances enhance the relationship between firms through the exchange of knowledge, resources, and capabilities. Suppliers can involve in the process of product design, whether distributors can participate in the process of distribution arrangements.
To create a successful alliance, the participants must share the same goals and objectives, they must have a desire to achieve them, and they must understand and carry out the processes required.
This type of strategic alliance can often be found in the service sectors where firms can conduct collaboration of expertise and offer complete services to customers.
Examples of Vertical Strategic Alliance
A company that makes coffee works with a company that makes coffee appliances. This vertical strategic alliance focuses on using technology to market a single-serve coffee-making system. Thus, two firms participating in different stages of the supply chain of coffee products work together to produce a better product for the market.
What is a Vertical Strategic Alliance Strategy?
Vertical strategic alliance strategy is a strategy firms deploy to pursue a vertical strategic alliance.
This type of strategic alliance demonstrates the collaboration between a firm and its forward or backward partners in the supply chain. Generally, these firms are suppliers (backward/downstream partners) and distributors (forward/upstream partners).
Why Do Vertical Strategic Alliances Exist?
The main purpose of this strategic alliance is to create a new competitive advantage for either one of the firms, or both.
The second purpose is for firms to adapt to environmental changes, that would otherwise be incredibly challenging or impossible to achieve without the partnership.
The last purpose is that the partnership represents an opportunity for firms to innovate their products and services.
Benefits of Vertical Strategic Alliance
Firms joining a vertical strategic alliance may enjoy the following benefits:
- Vertical strategic alliances offer potential maximization of profits. This is because the firms can cooperate with their partners by sharing resources and capabilities effectively and efficiently.
- Vertical strategic alliances may reduce costs and uncertainty. This is because the mutual trust between firms enables them to have confidence in advice and suggestions made by the other party.
- Vertical strategic alliances drive firms to offer lower prices and/or differentiated products. This is because the strategy aims mainly at enlarging the firms’ network and improving their relationship and synergy.
- Vertical strategic alliances help firms create new competitive advantage and maintain existing competitiveness. This happens because firms can now access more resources (assets and capabilities) with a greater volume over a long period.
- Vertical strategic alliances can help firms achieve organizational cooperation. This is because this type of partnership often has high quality and can offer complementary information necessary for effective cooperation.
- Vertical strategic alliances offer firms solutions to requirements of laws and regulations. It is important for firms operating legally in any industry to meet these policies.
Vertical Symmetric versus Vertical Asymmetric Alliance
A vertical symmetric alliance is a type of vertical strategic alliances in which a firm cooperating with a similar-sized firm.
Symmetric partners can help firms access more resources for a longer time horizon to maintain a competitive advantage. This type of strategic partnership may have a high chance of long-term success.
Vertical asymmetric alliance is a type of vertical strategic alliances in which a larger firm cooperating with a smaller firm.
In an asymmetric alliance, the smaller firm may share its knowledge and innovative technology with the larger firm until the latter learns and executes them. This relationship might not have a long duration because the small firm eventually becomes a burden for the large firm.
In general, vertical symmetric alliances gain more returns than vertical asymmetric alliances.
Resources
Further Reading
Related Concepts
References
- 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.
- Vertical vs. Horizontal: How Strategic Alliance Type Influence Firm Performance? (2019). Research Gate. Published.