Companies run their businesses in a market comprised of various competitors. The presence of other competitive businesses is good for your business and customers. Because healthy competition keeps you on track and customers would have more choices. Sometimes, businesses and companies join hands and share resources in order to deal with a certain situation.
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What is Strategic Alliance?
A strategic alliance is an agreement between two or more business entities where they could enjoy the benefits while maintaining their independence. The nature of strategic partnership could be short or long-term depending upon the agreement. However, the agreement of strategic alliance is usually less complicated than a joint venture where businesses create something new.
The strategic alliance could be formal or informal; it clarifies the roles and responsibilities of each partner in order to achieve mutual goals and benefits. The profit would determine the time period of alliance among partners. The alliance could help businesses to be efficient in their processes.
Reasons behind Forming Strategic Alliance
Businesses create a strategic alliance for various reasons, and they’re as follows;
- Achieve a competitive edge against the common competitor
- To collect resources to create a larger fund
- Learning the know-how of the new technology
- Achieving a price competitive edge
- Minimizing the risk factor of research and development
- Achieve economies of scale and cost reduction
- Maintaining the top leading role
- Speed up the process of the product development
- Entering into the new market
- Entering into the restricted market like the Chinese market
Types of strategic Alliances with detailed Examples
Horizontal Strategic Alliance
A horizontal strategic alliance is an agreement and alliance among companies that are operating their business in the same industry. The alliance is among the businesses that used to be the competitors; they join hands and share resources to achieve a competitive edge in the market.
The strategic business partnership alliance between Nissan and Renault is a very good example of a horizontal strategic alliance. This helped both companies to limit the research and development cost, rationalize the logistic cost, and achieve economies of scale through bulk production.
Vertical Strategic Alliance
A vertical strategic alliance is stretching your business upward, downward, or both of the supply chain. For instance, an automobile manufacturing company makes a business partnership with a foreign distribution network while entering into a new market in another country.
An ink manufacturing company makes a strategic alliance with the pigment manufacturer so that the company would have a consistent supply of raw material pigment.
Two companies share resources and create a new company through an agreement. In other words, the joint venture is a Child Company of two big parent businesses. It could be short-term or long-term, but it has clear goals and objectives, and the partner companies share their profit.
Google and GSK made a strategic alliance in 2016 to fund the research of treating a patient with electrical signals. The joint venture attracted the attention of many other firms and they share their resources in the development of the product.
Equity Strategic Alliance
Equity strategic alliance is when a business shares and equity of the other business. Two businesses purchase shares and equity of each other firm.
The relationship between Panasonic and Tesla is a very good example of an equity alliance. Panasonic invested 30 million dollars in battery technology for electric vehicles. It resulted in the form of establishment of a lithium-ion battery plant in Nevada.
Non-Equity Strategic Alliance
A non-equity strategic alliance is when businesses make an alliance and agreement where they share resources without creating any separate business. It’s usually informal and flexible than a regular form of partnership and equity. A great number of companies usually make a non-equity alliance.
The purpose of such a type of business alliance is to gain an advantage in sales, marketing, production, and research and development.
How to Make a Successful Strategic Partnership
Here’s how you can build a successful partnership by keeping in mind the following steps;
Your focus should on cost reduction, developing new products, and approaching more customers.
- The strategic business alliance should develop your core business competencies.
- It should minimize the potential competitive threat.
- It limits the risk factors that could hurt your business.
Advantages of Strategic Alliance
- New Perception. When two well-established businesses make strategic business partnership alliances, it sends a positive message in the market. Both companies could take advantage of each other’s reputation.
- Improves Existing Resources. It would help the employees of both companies to learn from each other skill and experience. They don’t have to hire any external trainers and mentors to train their staff.
- Lower Competition. The alliance sends a strong message to the competitors that both firms are here to stay and face the competition.
- Lower Risk. Business education teaches us that we have to do anything and everything. In reality, anything and everything brings a lot of uncertainties, baggage, risks, and liabilities. The partnership alliance helps you to reduce the risk factor.
- Affordable. Mergers and acquisitions are costly alternatives. Whereas strategic alliance provides businesses autonomy on the various operation of the company, they only have to share limited resources for mutual benefit.
- Intellectual Capital. When the two powerheads combine their capabilities, it goes much deeper than complimenting resources. Sometimes, it results in form of extraordinary intellectual developments.
- Expansion. When two businesses make strategic partnership alliances, then they don’t have to outsource various processes. They can develop it in-house, and it allows them to expand their resources.
- New Market. The strategic partnership alliance allows businesses to enter into the newer markets by partnering up with foreign companies. The new market would bring a lot of new opportunities and open new doors.
- New Clients & Skill. When you make a strategic alliance with a well-established business, then it would expand your client base and provide you an opportunity to learn new skills and update your skillset.
Disadvantages of Strategic Alliance
- Conflict. No contract and business partnership agreement cover everything. Whenever any uncertain incident happens that isn’t in the contract, then it creates a conflict of interest among members. It’s because they respond differently towards the same thing.
- Different Management Styles. The management style of different organizations is different, and it creates a unique type of workplace culture in an organization. In the case of a strategic partnership alliance, companies have to readjust their management in order to create a different type of workplace culture. It doesn’t happen often in reality.
- Impacting your Goodwill. When you make a business alliance with the other brand, then the public brand image and reputation impact your business. The customer market would start to question your credibility after the alliance.
- Trust Issues. Many partners in the strategic alliance tend to blame and point fingers at the partners. The blame game creates an atmosphere of distrust, tension, and stress both at the management level and among the workers. You can trust a person, but trusting a company with hundreds of people is a completely different thing.
- Uneven Relationship. One partner in the strategic alliances is usually weak, and it gives an upper hand to the strong partner. The weak partner has no choice but to agree in the decision market process of the alliance.
- Cultural Barrier. When a strategic business partnership alliance goes beyond the border and in a completely different geography, then it creates cultural and linguistic barriers. They create frustration and work delays. For instance, western companies are very specific about the job roles and responsibilities than Asian companies.