What Is a Strategic Alliance?
A strategic alliance is an arrangement between two companies to undertake a mutually beneficial project while each retains its independence. A company may enter into a strategic alliance to expand into a new market, enlarge its product line, or develop an edge over competitors. In some cases, strategic alliances can involve more than two companies.
Key Takeaways
- A strategic alliance is an arrangement between two (or more) companies that have decided to share resources to undertake a specific, mutually beneficial project.
- Strategic alliances can diversify revenue streams, grant access to potentially difficult-to-obtain resources, and may improve a company's public image.
- Strategic alliances may also cause companies to expend resources resolving conflict, fail to yield the hoped-for results, or negatively impact a company's public image.
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Understanding Strategic Alliances
At the heart of strategic alliances lies companies that are striving to grow but may not have the resources to embark on certain initiatives. Instead of going it alone, they can look for other companies with the needed resources or expertise to partner with.
Consider the massive client base of Uber. While Uber had an interest in making the ridership experience as pleasant as possible, single-handedly building out its own repository of music that riders could enjoy on demand would have been a costly challenge. So Uber turned to Spotify to enter into a strategic alliance.
Spotify, for its part, could boast of a well-developed technological product that was ready for a wider consumer audience (exactly what Uber had to offer). By forming a strategic alliance in which Uber provided the consumers and Spotify the technology, the two companies came together to create a market opportunity that neither could have achieved on its own.
Though less formal than some other types of business arrangements, a strategic alliance typically involves contracts that spell out the obligations of each alliance member.
Examples of Strategic Alliances
Strategic alliances can come in many sizes and forms. Some generic examples:
- An oil and natural gas company might form a strategic alliance with a research laboratory to develop more commercially viable recovery processes.
- A clothing retailer might form a strategic alliance with a single manufacturer to ensure consistent quality and sizing.
- A website could form a strategic alliance with an analytics company to improve its marketing efforts.
Types of Strategic Alliances
There are three primary forms of strategic alliances:
Joint Ventures
A joint venture occurs when two companies come together to create an entirely new, separate company that each of the existing companies becomes a parent to.
For example, in 2012, Microsoft and General Electric Healthcare signed a joint agreement to create a new, third company called Caradigm, with each of them owning 50%. Caradigm's mission was to develop and market an open healthcare intelligence platform. The idea behind the joint venture was that Microsoft had the technical capability of making such a platform work, while GE's healthcare IT division had the expertise on the healthcare side.
In 2016, GE Healthcare bought out Microsoft's share in the company. Then, in 2018, it sold the entirety of Caradigm to Inspirata.
Equity Strategic Alliances
An equity strategic alliance may have similar outcome goals as a joint venture. However, it is funded differently in that one company makes an equity investment into another.
For example, in 2010, Panasonic invested $30 million in the automaker Tesla by purchasing shares of Tesla common stock in a private placement. The investment was intended to build a stronger alliance between the two companies and to help expand Panasonic's footprint in the electric vehicle market. As one of the world's leading battery cell manufacturers, Panasonic's skill set blended strongly with Tesla's ambition to improve its battery packs and reduce its costs.
The relationship between the two companies continues to this day.
Non-Equity Strategic Alliances
In a non-equity strategic alliance, two entities come together without an exchange of equity. Each company simply brings its resources to the alliance for the mutual benefit of both. The relationship between Barnes & Noble and Starbucks is one highly visible example. Starbucks brews the coffee. Barnes & Noble stocks the books. Both companies do what they do best while sharing the costs of retail space to the their mutual benefit.
How Strategic Alliances Can Create Value
There are many reasons that a company might choose to enter into a strategic alliance. They include:
- Improving short-term finances. Companies wanting to see immediate financial impacts may find it easiest to leverage another company's resources to improve their short-term position in the market.
- Eliminating barriers to entry. Companies may not have the capital on hand to enter certain markets. Instead, they can partner with companies that have already made those investments to gain access cheaper and faster.
- Gaining better business insights. Companies may have no idea how a certain business model will perform. Instead of having to build out an entire model and self-fund an experiment, companies can leverage strategic alliances to "test run" how certain situations may go and use that information for future decision making.
- Sharing financial risk. Should a business venture fail, both parties in a strategic alliance are likely to share the financial responsibility. Instead of single-handedly bearing the brunt for the failure, each party may receive assistance from the other as part of the alliance agreement.
- Innovating beyond current capabilities. In the Panasonic/Tesla alliance mentioned above, their partnership put some of the smartest experts in electric vehicles and batteries on the same team, enhancing the innovative capacity of both organizations.
Note
Strategic alliances often form between companies with varying business or product cycles. For example, companies with short cycles may seek companies that have made long-term investments to aid in the rapid development of a product that would otherwise require more time.
How to Form a Strategic Alliance
Forming a strategic alliance requires creativity, forward thinking, and savvy business sense. Though strategic alliances can differ in many respects, most involve some common steps:
- Brainstorm potential partners. Often, strategic alliances unite companies in different industries. Consider other companies that may have a need for your services or have a weakness where your company has a strength. Conversely, consider the weaknesses of your own company and what types of entities could bring you the resources to help bridge the gap.
- Outline alliance proposals. Strategic alliances must make sense for both parties. A company that wants to initiate one needs to a propose a plan whose financial and strategic benefits to the other company are clear.
- Mutually determine goals. Both sides of a strategic alliance should have the opportunity to provide input on what the revenue and profit targets and operational strategy will be.
- Finalize the plan. Once both parties are on board, the strategic alliance can be formalized with the necessary legal documents, spelling out what is expected of each of them and what happens if one or the other fails to live up to its side of the bargain. This plan also acts as the roadmap for decision making in the future as the newly formed alliance moved forward.
Advantages and Disadvantages of Strategic Alliances
As with any major business decision, strategic alliances have potential upsides and downsides that are worth thinking through.
Pros of a Strategic Alliance
A strategic alliance can allow a company to take advantage of new opportunities it would otherwise miss out on. This could include adding new clients, branching out into in new markets, or creating and selling new products. Each of these avenues has the potential to increase a company's revenue and profitability.
Strategic alliances are also a way to diversify a company's revenue stream and mitigate company-wide financial risk. Alliances can also mitigate risk because companies with expertise in different areas give each other access to the resources to solve unique challenges or navigate unfamiliar business scenarios.
Finally, strategic alliances can benefit a company's image if it partners with another well-respected company, especially one that has an established presence in different markets.
Cons of a Strategic Alliance
A strategic alliance is most likely to succeed if there is strong communication between the partners. This means both parties must continually expend resources to manage the alliance and ensure that both sides are in sync and in agreement. In addition, if there are major disagreements between the alliance members, they may waste resources on resolving conflicts that would not have occurred had there been no alliance.
Though both parties should gain from a strategic alliance, one company will often benefit more than the other, and there may not be a simple solution to balance that out. There may also develop an unnatural reliance on one side or the other in terms of resources or expertise.
Just as a strategic alliance can sometimes burnish a company's public image, the opposite can also happen. One company's misdeeds can harm the other's reputation, even though it may have had nothing to do with them.
Pros
May result in gaining customers, especially ones in unfamiliar markets
May generate additional revenue and increase profitability
May diversify a company's revenue stream
May reduce operational risk of a company due to the addition of unique expertise and assets
May positively influence the image the company
Cons
May require more work in collaborating and communicating with larger teams
May result in costly conflicts should the alliance members disagree on strategy
May result in one side getting a better deal than the other (even if this wasn't what was planned)
May negatively influence the image of the company
Why Are Strategic Alliances Important?
Strategic alliances are important because they enable a company to benefit by leveraging the assets of another company.
What Is the Difference Between a Partnership and a Strategic Alliance?
An alliance is a collaboration between two companies in which each company is expected to profit or benefit from the agreement. A partnership is a more formal type of agreement in which partners combine to create a single, shared economic interest.
What Is the Difference Between an Alliance and an Acquisition?
In an alliance, two companies agree to cooperate on a particular project. In an acquisition one company simply buys the other.
What Is the Most Important Factor in a Strategic Alliance?
A strategic alliance creates a relationship between two entities. For this reason, the most important factor in the success or failure of an alliance is maintaining the trust and effective collaboration between their teams. The alliance must be guided by clear objectives to make sure both sides stay on the same page.
The Bottom Line
A strategic alliance is an agreement between two parties for the mutual benefit of both. While there are many examples of successful strategic alliances, companies also have to be careful to choose the right partners and make sure that the alliance's goals are clear and well-understood from the outset.
