What are Strategic Alliances?
Strategic alliances are agreements between two or more independent companies to cooperate in the manufacturing, development, or sale of products and services, or other business objectives.
For example, in a strategic alliance, Company A and Company B combine their respective resources, capabilities, and core competencies to generate mutual interests in designing, manufacturing, or distributing goods or services.
There are three types of strategic alliances: Joint Venture, Equity Strategic Alliance, and Non-equity Strategic Alliance.
#1 Joint Venture
A joint venture is established when the parent companies establish a new child company. For example, Company A and Company B (parent companies) can form a joint venture by creating Company C (child company).
In addition, if Company A and Company B each own 50% of the child company, it is defined as a 50-50 Joint Venture. If Company A owns 70% and Company B owns 30%, the joint venture is classified as a Majority-owned Venture.
#2 Equity Strategic Alliance
An equity strategic alliance is created when one company purchases a certain equity percentage of the other company. If Company A purchases 40% of the equity in Company B, an equity strategic alliance would be formed.
#3 Non-equity Strategic Alliance
A non-equity strategic alliance is created when two or more companies sign a contractual relationship to pool their resources and capabilities together.
Reasons for Strategic Alliances
To understand the reasons for strategic alliances, let us consider three different product life cycles: Slow cycle, Standard cycle, and Fast cycle. The product life cycle is determined by the need to innovate and continually create new products in an industry. For example, the pharmaceutical industry operates a slow product lifecycle, while the software industry operates in a fast product lifecycle. For companies whose product falls in a different product lifecycle, the reasons for strategic alliances are different:
#1 Slow Cycle
In a slow cycle, a company’s competitive advantages are shielded for relatively long periods of time. The pharmaceutical industry operates in a slow product life cycle as the products are not developed yearly and patents last a long time.
Strategic alliances are formed to gain access to a restricted market, maintain market stability (setting product standards), and establish a franchise in a new market.
#2 Standard Cycle
In a standard cycle, the company launches a new product every few years and may or may not be able to maintain its leading position in an industry.
Strategic alliances are formed to gain market share, try to push out other companies, pool resources for large capital projects, establish economies of scale, or gain access to complementary resources.
#3 Fast Cycle
In a fast cycle, the company’s competitive advantages are not protected and companies operating in a fast product lifecycle need to constantly develop new products/services to survive.
Strategic alliances are formed to speed up the development of new goods or services, share R&D expenses, streamline market penetration, and overcome uncertainty.
Value Creation in Strategic Alliances
Strategic alliances create value by:
- Improving current operations
- Changing the competitive environment
- Ease of entry and exit
Current operations are improved due to:
- Economies of scale from successful strategic alliances
- The ability to learn from the other partner(s)
- Risk and cost being shared between partner(s)
Changing the competitive environment through:
- Creating technology standards (for example, Sony and Panasonic announce to work together to produce a new-generation TV). This would help set a new standard in a competitive environment.
Easing entry and exit of companies through:
- A low-cost entry into new industries (a company can form a strategic partnership to easily enter into a new industry).
- A low-cost exit from industries (A new entrant can form a strategic alliance with a company already in the industry and slowly take over that company, allowing the company that is already in the industry to exit)
Although strategic alliances create value, there are many challenges to consider:
- Partners may misrepresent what they bring to the table (lie about competencies that they do not have).
- Partners may fail to commit resources and capabilities to the other partners.
- One partner may commit heavily to the alliance while the other partner does not.
- Partners may fail to use their complementary resources effectively.