Advantages and Disadvantages of Strategic Alliance

A Strategic Alliance is an agreement among companies to do business together in such a way that goes beyond normal company-to-company dealings, but fall short of a merger or a full partnership.

In a business it is a relationship between two or more companies which enables each to accomplish specific strategic objectives neither would be able to achieve on their own.

Strategic alliances could be as simple as two companies sharing their technological and/or marketing resources. On the contrary, they could be extremely complex, involving a number of organizations, positioned in different nations around the world.

These companies may in turn be associated with other businesses in separate alliances. The result is a maze of intertwined companies, which may be competing with each other in numerous product areas while working together in some.

What are the Advantages and Disadvantages of Strategic Alliance ?

The main advantages of Strategic Alliances between companies are :

A strategic alliance allows a business to get competitive advantage through access to a partner’s resources, including markets, technologies, capital and people. Joining up with others provides complementary resources and capabilities, making it possible for businesses to grow and expand more speedily and efficiently. Alliances also benefit organizations by lowering manufacturing costs, and developing and diffusing new technologies quickly.

Strategic Alliances are also employed to speed up product introduction and overcome legal and trade barriers expeditiously. In this age of rapid technological changes and global markets forming alliances is usually the quickest, most effective technique for attaining growth objectives.

Having said that, organizations must ensure that the objectives of the alliance are compatible and in tune with their existing businesses so their expertise is transferable to the alliance. A correctly structured strategic alliance can bring numerous opportunities and improve the parties’ growth potential. On top of that, it can offer an alternative source of capital during challenging economic times.

Advantages and Disadvantages of Strategic Alliance

Figure 1

Making it possible for each partner to concentrate on activities which best match their capabilities.
Gaining knowledge from partners & developing competences which may be more widely exploited elsewhere.
Adequate suitability of the resources & competencies of an organization for it to survive.
Speed to market is vital, and strategic alliances considerably improve it.
Partnerships facilitate access to global markets.

The main disadvantages of Strategic Alliances in business are :

Strategic alliances undoubtedly have built in challenges. Perhaps the primary disadvantage is the fact that one partner which handles all of its business internally must now depend on a second partner.

Any organization deciding on strategic alliance incurs some costs in addition to benefits, when compared to a company which goes alone. Strategic alliances have their own risks, specifically if the parties are not financial equals. These risks range from the loss of operational control and confidentiality of proprietary information and technology.

A number of alliances can involve a clash of corporate cultures or the perceived diminution of independence. In addition to that, the partners may deprive themselves of future business opportunities with competitors of their strategic partner.

If you don’t have a carefully vetted contractual agreement, you’ve got no guarantee that the alliance will be good for you, or that you’ll get as much as you give in terms of referrals.

Watch a video on Advantages and Disadvantages of Strategic Alliance in Business

The alliance partner may become a rival at some point, if it profited enough from the alliance and grew enough to finish the partnership and then has the capacity to operate on its own in the same market segment.

Also Read: Pros and Cons of Strategic Alliances

The companies should take into account a variety of factors in the decision of whether to enter into a strategic alliance, and how best to govern the partnership when the alliance is created.

In addition to the parties’ business objectives, the companies should think about a number of accounting, tax, antitrust and intellectual property challenges when structuring a strategic alliance.