Definition of Strategic Alliances
The concept of Strategic Alliances can be defined as an arrangement between the two companies with an intention to share the resources and undertake a specific project that is mutually beneficial to both the parties involved. In the process of Strategic Alliance, each of the company maintains its autonomous position whilst gaining and exploring the new opportunities for growth and development.
The process has relatively less binding as compared to the joint venture where both the companies pool the resources to create a separate business entity.
The main benefits of Strategic Alliances include developing more effective and efficient business processes in the company, expansion into the new markets, and gaining a competitive advantage in the market.
The main purpose of Strategic Alliances :
Strategic Alliances allows the two involve organizations or entities to work towards the common goal with the correlated objectives with an aim to benefit on a short-term as well long-term basis.
The roles and responsibilities of each of parties are clear irrespective of the agreement made is formal or informal in nature. Depending on the nature of the goals and needs of both the parties involved, the agreement made is either short term or long term in nature and working.
The organizations getting into Strategic Alliances are able to attain their goals and make use of the opportunities at a faster rate as compared to the organization functioning alone. One of the biggest purpose and advantage of the arrangement of Strategic Alliance is that allows both the organization to share the resources and knowledge that works as a learning curve for both the parties and is quite beneficial on a long-term basis.
It saves on the factors of time and expenses as all the costs are shared. It is more flexible as compared to the growth strategy of the joint venture as the parties involved do not need to merge their assets or funds in order to proceed with the objective of goal accomplishment.
In fact, as both, the parties involved work on an autonomous basis and it helps in easing out the overall functioning of the agreement when the business practices of both the parties are varied in nature.
The risks involved in Strategic Alliances:
- There can be differences between both the parties on the processes and operations of the business activities even after the arrangement is clear and crisp for both the organizations.
- If there is a term in the agreement of the Strategic Alliance that the parties need to inform each other of their proprietary information that it requires a high level of trust between both the entities.
- The parties may become mutually dependent on each other in case of the long-term Strategic Alliances.
- Partners may misrepresent or lie about their competencies or other crucial factors.
- One party may be able to stand to the commitment of resources and capabilities to the other party involved.
- In the alliance, one of the parties may commit heavily whilst the other may not be that serious about the accomplishment of the common goals and objectives.
- It can be the case that the partners may fail to utilize their complementary resources in an effective manner.
Types of Strategic Alliances:
1) Joint Venture
A joint venture can be defined as an alliance in which the parent companies build and establish a new company. For example, companies A and B can form a joint venture together and create a new company by the name of C. The partnership can be either 50-50 percentage or as per the terms decided in the agreement.
2) Equity Strategic Alliance
An equity strategic alliance is formed when one company purchases the certain percentage of the equity of the other company. For example, if company A purchases 45% of the equity in the company B, then equity strategic alliance is created.
3) Non-Equity Strategic Alliance
When two companies get into a contractual relationship or an agreement to pool their resources and capabilities to attain the common goal and objective, a non-equity strategic alliance is created.
Reasons for the Strategic Alliances:
1) Slow Cycle of the business
When the business cycle is slow in nature owing to the various external and internal factors, the company’s competitive advantage is relatively shielded for a relatively long time period. Even the company doesn’t come up with the new and latest offerings for the target market.
In this case, Strategic Alliances can be formed to explore the new and restricted markets and gain stability in the market by sharing and competencies through the alliance.
2) Standard Cycle of the Business
During the standard cycle of the business, the company launches the new line of products every few years and in regular intervals but may or may not be able to maintain its leading and top as a market leader.
In this case scenario, Strategic Alliances as formulated to gain higher market share, gain access to the complementary resources, generate economies of scale, beat other competitive companies, and pool resources for the projects that require a large number of funds and capital investments.
3) Fast Cycle of the Business
In the fast cycle of the business, the company needs to come up with an offer the new range of products on a constant and continuous basis to survive in the market. The company’s competitive advantages are not protected.
In this case scenario, Strategic Alliances are formed in order to speed up with the development of new products, overcome the factor of uncertainty, share the expenses of research and development, and align the process of market penetration.
Value Creations in Strategic Alliances :
Strategic Alliances creates value
By improving the current business operations:
Changing the competitive environment by giving a competitive edge to the organization
By giving an ease of entry and exit in the market to the organization
Improvement in current operations:
Successful Strategic Alliance create successful economies of scale that helps the organization to grow by gaining huge market share
It is a learning curve for the organization
The factors of risks and costs get shared between both the parties involved
Changes in the competitive environment:
A tacit collusion is created giving a competitive edge to the company.
The company is able to set new and high technological standards in the market, beating its arch rivals.
Easing of exit and entry of the company:
The company can easily enter into the new market or an industry through the formation of a Strategic Alliance
The new entrant in the market can create a strategic alliance with the company that is already a part of the industry and can gradually take over that company, allowing the company to take an easy exit from the market.
The importance of Strategic Alliances:
- It is very critical and significant for the success of the organization and helps to attain the overall goals and objectives of the business.
- It blocks the competitive threat for the company gaining a competitive advantage.
- It helps to make strategic decisions and choices.
- It is crucial for the development and maintenance of the core competencies of the business.
- It helps to mitigate the significant risks to the business.
Example of Strategic Alliances:
Apple Pay and MasterCard
The technology giant Apple formed a strategic alliance with the one of the second largest credit card provider in the world, MasterCard, in order to attain the credibility in the area of processing field and merchant services, even though it would seem that both the companies are competing against each other.
MasterCard gets the advantage to be the first authorized option for Apple Pay; Apple Pay gets to cache on the repute of MasterCard. The rich experience of MasterCard helps Apple to work out the potential bugs and other related issues with the growing prevalence of Apple Pay.