Strategic Alliance – Definition, Forms, Pros and Cons

Strategic Alliance - Definition, Forms, Pros and Cons, Risks

A Strategic Alliance is a vital building block for a company to attain stronger and more effective market presence.

Definition of Strategic Alliance

Following are some definition of strategic alliances by different authors:

  • In simple terms, a strategic alliance is typically just referred to as “partnership” which provides organizations a chance to get together for a mutually beneficial opportunity and sustained competitive advantage (Yi Wei, 2007).
  • According to Wikipedia, An alliance is an agreement involving more than one parties to focus on a set of agreed upon objectives needed while staying independent businesses.
  • A business alliance is a long-term value-creating relationship.
  • An alliance is a positive relationship between two businesses which increases revenue, industry reach and internal knowledge.
  • We can describe an alliance as a process in which members willingly alter their basic business practices with a purpose to lessen duplication and waste while facilitating improved performance (Frankel, Whipple and Frayer, 1996)
  • A strategic business alliance is a formal agreement based upon mutual trust to cooperate intensively to achieve an objective which alliance partners cannot achieve independently.
  • Alliances are agreements among business partners to succeed in objectives of common interest. Alliances are among the different alternatives which companies can use to achieve their goals; they are based on cooperation between companies (Mockler, 1999)

Some characteristics of strategic alliances:
1. Minimum two organizations (business units or companies) make an agreement to attain objectives of a common interest deemed important, while remaining independent with regards to the alliance.
2. The alliance partners share both the merits and control of the management of the alliance for its entire duration.
3. The parties contribute, making use of their own resources and capabilities, for the development of one or more aspects of the alliance like  technology, marketing, production, R&D or any other area.

According to (Spekman, 1998), alliances have certain characteristics :

  • each has goals which are both appropriate and directly linked to the partner’s strategic intent;
  • each has the commitment of, and access to, the resources of its strategic partners and;
  • each signifies an opportunity for organizational learning.

Forms of Strategic Alliance

Following are different forms of alliances in business :

Alliances could possibly be contracts, limited partnerships, general partnerships, or corporate joint ventures, or might take less formal forms, say for example a referral network. According to Richard J. Chernesky, all alliances fit into three basic classifications:

Forms of Strategic Alliance in business

  1. A trading alliance is simple – simply buyers and sellers forming a largely passive sales and distribution or export/import arrangement primarily based on contractual terms.
  2. A functional alliance brings together specific basic “functions” between the two partners by pooling efforts to achieve certain goals and establish ongoing management relationships. These alliances are often employed to focus on or boost research and development projects, share costs, provide geographical market access and, frequently, improve distribution or sales functions.
  3. A dynamic alliance includes the “hidden” assets of the two alliance partners with regards to the skills, knowledge and capacity required to deliver results. Forms of “hidden assets” are research and development capabilities, proprietary technologies, organizational strength or market-based acceptance. In a dynamic alliance, chosen hidden assets are integrated. Having said that, in many cases, the partners have no idea exactly what assets will be required since the structure of the alliance usually evolves during negotiations and initial operations.

Coopers and Lybrand (1997) identified the following types of strategic alliances:

  • Joint marketing/promotion
  • Joint selling or distribution
  • Production
  • Design collaboration
  • Technology licensing
  • Research and development contracts

Technology Associates and Alliances, a consulting company, lists the following forms of alliances in :

Marketing and sales alliances:

  • Joint marketing agreements
  • Value added resellers

Product and manufacturing alliances:

  • Procurement-supplier alliances
  • Joint manufacturing

Technology and know-how alliances:

  • Technology development
  • University/industry joint research

The most basic form of an alliance is a contractual arrangement. Contractual based alliances usually are short-term arrangements which are suitable when a formal management structure is not needed.

The most sophisticated form of a strategic alliance is actually a joint venture. A joint venture consists of setting up a separate legal entity (usually a corporation, limited liability company, or partnership) through which the business of the alliance is carried out.

Pros and Cons of Strategic Alliances

Following are some reasons for forming an alliance between companies :

  • Getting in a alliance could possibly be the best way to establish standards of technology in the sector.
  • The alliance approach better suits and responds to the uncertainties and complexities of today’s globalized business environment.
  • Strategic partnerships allow access to skills and resources of other partners so as to strengthen the organization’s competitive strategies.
  • Building business strategic alliance relationships gives access to new trading markets, speeds up the pace of entry, promotes the sharing of R&D, manufacturing, and/or marketing costs, expanding the product line/filling product; and learning additional skills.
  • For certain projects, chances of failure are huge, and even higher when investments are higher.
  • Alliances are designed to divide fixed costs of production and distribution, aiming to boost volume.
  • The starting point of many business alliances is the convergence among technologies. It is increasingly more frequent that organizations need to appeal to their competition in various sectors if they desire to realize a product line.
  • Traditional businesses have a tendency to enter into strategic alliances for reasons like geographic expansion, cost reduction, manufacturing, and other supply chain synergies.
  • In today’s fast changing business landscape, strategic partherships make it possible for a business to gain competitive advantage.
  • Alliances also allow businesses to avoid controls on import and overcome barriers to commercial penetration. Business Alliances can also be an approach to respect the bonds posted by the “host” country relating to value added local content and participation in the capital of local businesses.
  • Setting up a strategic alliance adds complementary resources and capabilities, making it possible for alliance partners to grow and expand rapidly and efficiently.
  • Fast-growing businesses depend greatly on alliances to extend their technical and operational resources.
  • Alliances have become a fact of life for business, a significant piece of current operations as well as future strategy. Creating sustainable value for clients and shareholders demands forming effective alliances.

Also Read: Advantages of Strategic Alliances

Cons of Strategic Alliances in business

  • Without a certain level of trust and honesty, an alliance partnership has no foundation to build on. It is vital for both partners to set their expectations clearly and concisely prior to the partnership is solidified.
  • Cultural clash is probably one of the major challenges that companies in alliances face today.
  • Cultural differences often lead to further problems in making alliances work particularly between Asian and Western companies.
  • In many strategic alliance cases one organization will point the failure finger at the partner organization. Shifting the blame does not solve the issue, but adds to the tension between the alliance partners and often leads to alliance ruin.
  • Alliances can produce indirect costs by blocking the opportunity of cooperating with rival businesses, thus possibly even denying the company different financing options.
  • Alliance firms are afflicted by delays in solutions because of problems of coordination and an alert rival may take advantage of this weakness in-built in any alliance to its great advantage.

Figure: Pros and Cons of alliances

Pros and Cons of Strategic Alliances

Some Risks of Strategic Alliances

Alliances have their risks, specifically if the partners are not financial equals. These risks range from the loss of operational control and confidentiality of proprietary information and technology. Though the agreement is mostly explained clearly, the differences in how the organizations function could potentially cause some challenges. Additionally, if the business alliance demands informing one party of the other party’s proprietary information, there could be a degree of distrust within the corresponding leadership.

Also Read: Strategic Alliance Examples

In the event of long-term alliances, the concerned partners could become influenced by one another. Even though the risk is lower if the dependency is experienced by both sides, the risk can increase tremendously if the dependence gets one sided, because this puts an advantage to one partner.

The partners must think about a number of factors in the decision of whether to enter into a strategic alliance, and how best to govern the relationship when the alliance is created.

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