Companies are separate legal entities that can perform operations on their own. They are independent of their shareholders and other parties. Legally, these business structures can stand on their own without the need for support. These are the features that make companies one of the most complex yet impactful types of businesses.
Sometimes, however, companies may also need to cooperate or collaborate with others. This need for being dependent does not come from a company’s operations. Instead, it arises from the objective to be profitable or successful. In these circumstances, companies may come together to form partnerships with other companies. These partnerships may fall into strategic alliances.
What is a Strategic Alliance?
A strategic alliance is a business activity in which two companies cooperate and coordinate to obtain mutual benefits. However, it does not compromise the independence of both companies. Usually, strategic alliances differ based on companies’ requirements and objectives. These alliances allow companies to achieve their strategic goals without bearing significant burdens.
A strategic alliance is a cooperative business activity. Usually, these alliances form when two separate organizations come together to achieve strategic objectives. In some cases, however, these alliances may also include more than two parties. Strategic partnerships do not alter or modify a company’s separate identity. Instead, it allows them to stay independent but also partners with others to achieve benefits.
Strategic alliances allow participants to achieve economies of scale or synergies. These participants can benefit from each other’s skills and enable the transfer of these skills between them. Usually, these alliances include partnerships, joint ventures, outsourcing, etc. All participants that enter into a strategic partnership get to profit from it. Therefore, it presents a win-win opportunity for everyone.
Strategic alliances are not the same as joint ventures. With these alliances, companies come together to obtain their goals while also being independent. However, joint ventures require the formation of a new, separate legal entity. In strategic alliances, the same does not occur. Therefore, these are not the same. However, strategic partnerships can lead to joint ventures in the future.
How does a Strategic Alliance work?
A strategic alliance begins with two companies realizing an opportunity to collaborate to achieve their objectives. In some cases, as mentioned, it may also involve more than two companies. Usually, strategic alliances are formal alliances formed between participants. However, it may also include informal or temporary partnerships.
When companies come together in a strategic alliance, they have objectives in mind that they want to achieve. Usually, these objectives are not achievable for them as an independent body. Therefore, they form an alliance to benefit from the other participant’s cooperation. In exchange, they also provide value to the other participant, thus, making this a mutual coordination.
Before entering a strategic alliance, all parties involved define their responsibilities. Once done, each party will be in charge of ensuring they satisfy those requirements. Since all parties gain from a strategic alliance, it will continue until all these gains materialize. Once all parties meet their objectives from the strategic alliance, it will dissolve. In some cases, these alliances may also lead to further partnerships or the formation of joint ventures.
Strategic alliances involve the sharing of resources from all participants. These resources may include skills, networks, market position, assets, etc. There are several reasons why companies may enter into strategic alliances. For example, they consist of entering new markets, quickly growing, sharing technology, etc. However, these must be beneficial to all participants.
What are the types of Strategic Alliances?
There are three primary types of strategic alliances. Based on the participants’ requirements, the alliance will differ. Similarly, each type has its benefits and drawbacks. Ultimately, it is for the participants to decide which the best option is. The three primary types of strategic alliances are as below.
Joint venture
Joint ventures are separate entities created by two or more parent companies. Furthermore, these ventures form as a result of a strategic alliance between several participants. Joint ventures may have a strategic purpose or a continuous objective. However, its goals are clear before forming the venture. Similarly, companies will usually get the same profit-sharing from their operations.
Equity strategic alliance
Equity strategic alliance involves the acquisition of one company’s equity by another. However, the investor does not gain control of the underlying company. Instead, it obtains enough shares to become a strategic partner. In some cases, all participants will acquire each other’s equity instruments to form a strategic alliance.
Non-equity strategic alliance
Non-equity strategic alliance includes all partnerships that do not fall in the above two categories. It does not involve the formation of a new company or the exchange of equity instruments. Instead, all involved parties enter an agreement to share resources. These alliances are more informal but make up a significant portion of all strategic partnerships.
What are the characteristics of a Strategic Alliance?
There are several characteristics that a well-structured and planned strategic alliance illustrates. These characteristics also present the benefits that participants can get from these alliances. Some of the critical ones include the following.
Synergies
Strategic alliances allow the formation of synergies between participants. When strategic partners come together in these alliances, they can achieve more than what they can alone. Similarly, they have more strength combined than they have as separate entities. The formation of synergies is one of the most critical characteristics of strategic alliances.
Opportunities
Ideally, strategic alliances will provide every participant with new opportunities. However, that may not always be possible. A strategic alliance must present at least one of the participants with the opportunity to gain benefits. If a strategic partnership fails to provide profits to one participant, it will not be considered a well-structured strategic alliance.
Limited resources
Usually, strategic alliances form due to the limited resources that companies have. Each partner in these alliances may have an asset from which another can benefit. Therefore, strategic alliances allow participants to complement each other’s weaknesses despite the limited resources. Being independent or separate, these participants can not get the same benefits.
Lower risks
When companies undertake a new venture, they bear significant risks. However, with strategic alliances, these companies can share them with their partners. Therefore, every participant in the process gets to share their risks with their strategic partners. Usually, it also helps them lower their financial burden. It results in lower risks for all the parties involved.
Clear objectives
As mentioned, strategic alliances require each participant to clarify their responsibilities. As a result, it also helps every party understand what the others expect from the strategic partnership. Therefore, strategic alliances will have accurate results, goals, methods, and resource commitments. Every party in these alliances will understand their responsibilities while also knowing their objectives.
What are the limitations of Strategic Alliances?
Despite being mutually beneficial, strategic alliances can have some limitations. These restrictions also form the disadvantages that companies can get from entering into such partnerships. Some of the primary limitations of strategic alliances include the following.
Confidentiality
Confidentiality is a critical issue when it comes to strategic alliances. Companies that enter into these alliances share their resources. These resources include skills and knowledge. Sometimes, the involved parties may fear that they may lose their competitive advantage by disclosing information. There are some remedies to prevent such instances. However, it may not always be effective.
Uneven alliances
Strategic alliances don’t always include participants with the same resources or stature. Uneven strategic partnerships may also exist, where some participants have more power than others. This difference between size or impact can create significant problems for the smaller partners. It also hinders the purpose of strategic alliances, which is to provide all participants with benefits.
Competition
Strategic alliances may also involve participants from the same markets or industries to come together. For companies, it means helping competitors with their objectives. Therefore, these alliances can result in an increase in competition for companies. In these cases, companies may prefer to work independently rather than forming a strategic alliance.
Conclusion
A strategic alliance is an agreement between two or more participants. It includes coordination or collaboration between those parties. Usually, it involves sharing resources and achieving specific objectives. There are several types of strategic alliances that exist. These alliances have various characteristics and limitations, as mentioned above.
