A Strategic alliance is a partnership where two or more companies decide to cooperate for their mutual benefit by combining their resources- financial, managerial, and technological as well as their competitive advantages. Although forming an alliance could be beneficial to a business, but there are also some risks of strategic alliances in business.
A global strategic alliance means cooperation between international companies and it can take various forms, such as co-funding of research projects, sharing of production facilities and marketing of each others products using current distribution networks.
What are the Main Disadvantages of Strategic Alliance ?
- Cultural and Language Barriers: Cultural conflict is probably the most significant challenge which businesses in alliances experience today. These cultural problems include language, egos, and different attitudes to business can make it tough. The first thing which can cause problems is the language barrier which they might face. It is crucial for the businesses that are functioning jointly to be able to communicate and understand each other well or they will likely fail. Language barriers sometimes can be a source for delays and frustrations. Communication problems might also occur because job definitions are much more specific in Western companies compared to Asian companies.
- Uneven Alliances: When the decision powers are distributed very uneven, the weaker alliance partner may be compelled to act in line with the will of the more powerful partners even if it is actually not willing to do so.
Figure: Pitfalls of Strategic Alliances between Companies
- Lack of Trust: In several alliances one partner will point the failure finger at the other partnering company. Transferring the blame will not solve the issue, but increases the stress between the alliance partners and usually ruins the alliance. Building trust is an essential and yet most challenging element of a successful alliance. Only people can trust each other, not the company. For this reason, alliances must be formed to improve trust between individuals. Quite a few alliances didn’t work because of the lack of trust leading to unsolved issues, lack of understanding, and despondent relationships.
- Damage to Goodwill: In case you create an alliance with another organization, the other business’s poor public relations can harm your organization’s reputation. Even if your alliance partner satisfies all of its obligations to you and faithfully promotes your business, it might still be linked to other acts of bad faith which may stain your organization.
- Differences in Management Styles: Failing to understand and adjust to “new style” of management is an obstacle to success in an alliance. Adjustments are needed in management style to run successful alliances. The adaptation of a new style of management needs a change in corporate culture, which should be initiated and nurtured by the top management. Some other challenges which may occur between businesses in alliances are different attitudes among the companies. For example, one partner may deliver its good or service behind schedule, or do a bad job producing their goods or service, which can result in distrust between the two alliance partners.
- Potential for Conflicts: The understanding reached among the partners is crystallized into an agreement of alliance. Having said that, no agreement will be able to capture every detail of an understanding. The complexity grows when a situation originates that is unexpected or not provided for in the agreement. This can create conflict over goals, domain, and techniques that must be followed in the alliance activity among the partners and could possibly lead to setbacks to the alliance.
Watch a Video on Disadvantages of Strategic Alliance in Business
- Loss of Autonomy: The business gets focused not only to a goal of its own but that of the other business. This demands cost in terms of goal displacement. The business at the same time loses the independence and hence its ability to unilaterally handle the outcomes. All the partners in an alliance have control over the performance of the assigned tasks. No partner, hence, can unilaterally control the result of an alliance activity. The business may not be able to use its own time-tested technology, if the alliance partner refuses to subscribe to it.
It may have to use the dominant partner’s technology, that could be different, or the combination of its own technology and its partner’s. This is very likely to have its affect on the stability of the business since it gets exposed to the uncertainty of using new technology.