Strategic alliances can be seen as one of the fastest growing trends for business today; Alliances are sweeping through nearly every industry and are becoming an essential driver for their super growth. A strategic alliance, by definition, is a form of affiliation that involves a mutual sharing of resources for the benefit of all of the strategic partners. “Mutuality” is key. The business consideration is whether both alliance partners need each other. Strategic alliances range in size and scope from informal business relationships based on simple contracts to joint venture agreements, some times where corporations are set up to manage the alliance. Strategic alliances are cropping up across the global arena mainly due to the maturation of several trends of the 1980s, such as: intensified foreign competition, shortened product life cycles, soaring cost of capital, including the cost of research and development, and ever-growing demand for new technologies. However, strategic alliances can be tricky. Partnerships foster mutual benefits, but the alliances exist only as long as they are advantageous to both parties.
Definitions of Strategic Alliances
- Hamel (2007) defined strategic alliance as a relationship between two parties for achieving a set of agreed goals and develop the business status in the market.
- In the words of Das and Teng (2006), strategic alliances are an agreement made between two or more companies who have agreed to share their resources and achieve mutual benefits in the process.
- Dussauge and Garrette (2008) stated that strategic alliance is the process of joining hands for achieving common goals and objectives.
- Faulkner (2009) highlighted that the strategic alliance builds a relationship between two or more companies that would pursue common objectives in their own ways.
- According to Inkpen (2003), whenever there is a formal agreement between two or more like minded firms to collaborate for the purpose of attaining common goals and objectives, it is referred to as a global strategic alliance.
- Beverland and Bretherton (2001, p.89) posit that it may also refer to myriad of well established economic partnership between potential and actual competitors in the marketplace.
All these definitions convey the same meaning that strategic alliance is the formation of an agreement or relationship for improving the business conditions. However, the differences lie in the features briefed in these definitions.
Why Strategic Alliances?
Strategic alliance is an agreement between two or more individuals, or entities, or organisations to cooperate in a specific business activity, so that each benefit from the strength of other and gains competitive advantage. The formulation of strategic alliance has been seen as a response to the globalization and increasing uncertainty and complexity in the business environment. Strategic alliances involve the sharing of knowledge and expertise between the partners as well as in reducing the risk and costs in areas like relationship with the supplier and the development of new products and technologies. Strategic alliances usually make sense when the parties involved have complimentary strengths. Its unlike full-scale acquisition, an alliance does not give a firm total control over its partners.
For many multinational firms, strategic alliances have become increasingly important tools for ensuring speed and flexibility in carrying out multinational strategies. A typical example is SEVEL (Societa Europea Veicoli Leggeri), the 1978 strategic alliance between Fiat and Peugeot for the production of a new light van named Ducato. Both parties were short on resources and saved time and energy by combining their R&D and manufacturing efforts. Strategic alliances can be effective ways to diffuse new technologies rapidly, to enter a new market, to bypass governmental restrictions expeditiously, and/or to learn quickly from the leading firms in a given field.
Strategic alliance is based on the belief that two is better than one. With the growing competition, organisations are trying to extract any and every benefit that the industry offers. The business houses aim to gain a competitive advantage in their activities such as doing research development at a decreased cost or getting most of the customer base without dispensing too much into market research projects or trying to assess the customer behaviors and psycho graphs. Strategic alliance evolved to satisfy this need of the business organisations and help them in attaining superior position in comparison to their competitors. As the demands for forming strategic alliances grew, the role of the concept also enlarged.
Reasons for Strategic Alliances
- Alliances assist the firm’s learning and diversification into new areas of activities – Alliances help to extend a firm’s competitive advantage in several ways. A firm enters into strategic alliance because this can potentially provide benefits that are not possible through either internal development or external acquisition. This helps the company to acquire benefit by reducing the cost rather than taking it all by itself. An alliance stand as an intermediate to help the allies enter into new industry and markets.
- Alliances provide useful platform to test their products in new markets – Alliances help in extending and renewing their sources of competitive advantage while expanding globally. This helps the new companies to enter into new market with little market knowledge. By this these companies learn how to compete in the global market. Working together helps in overcoming the economic obstacles too.
Types of Strategic Alliances
Strategic alliances can be classified into three main types:
- Shared-Supply Alliances – Shared-supply alliance bring together companies which join forces to achieve economies of scale on a given component or on an individual stage in the production process. The shared elements are further incorporated in products that are further incorporated in products that remain specific to each other and that competes directly in the market. This type of alliance is formed when the minimum efficient size at a particular stage in the production process is much greater than for the entire product, and when neither of the partner produce large enough to achieve the critical size. Shared-supply alliance are usually formed between partners of comparable size. This alliance primarily involves research and development (R&D) and manufacturing activities. Coordination of research activities between the partners makes it possible to optimize the use or resources. These alliances are usually formed by firms operating in the same zone. In this case of shared supply alliance the assets and skills that the partner companies bring to the joint project are similar in nature and their goal is to benefit from increased economies of scale.
- Quasi-Concentration Alliances – This alliance brings together companies that develop, produce and market a joint product. There is no open competition in quasi-concentration alliance. Quasi-concentration alliances are primarily characterized by transactions between the consortium of allies and the market. Transactions between the companies are also carried out within the alliance. This alliance covers all the main functions involved in carrying out an activity, that is, research and development, manufacturing, and marketing. Marketing and sales are either split between the partners on the basis of geographic presence or carried out jointly.
- Complementary Alliances – Complimentary alliances bring together companies which contribute assets and skills of different natures to bring up a combined project. Here one manufactures the product, which is marketed by other’s distribution channels. There is no competition within the allies. This type of an alliance is mainly formed by only two parties.
Advantages of Strategic Alliances
Business alliances have enormous benefits for all the parties involved in the merger. First, it increases the available financial resources to carry out a specific objective. All the parties in the alliance pull their financial resources together to facilitate the implementation process of their goals. Mergers and joint ventures have a large pool of resources since; both parties commit to a similar objective. Some organization goal requires huge initial capital, which in some instances, organizations could not manage on their own. However, after the merger businesses can direct their resources toward a similar objective.
The second advantage of alliances is that it increases the level of technical experience. Each organization before the merger had its business skills and problem-solving techniques. After the alliance, managers share their knowledge and expertise, hence, improving decision-making in the organization. For instance, one of the business managers may be experienced in ways of dealing with the competition; this manager will share his or her experiences with other managers in the merger. The third advantage of alliances is that it increases the competitive edge of the firms. Most of the market leaders in the global market are mergers since; they can cover a broad market. Strategic alliances would reduce the level of competition, especially if both parties were market rivals.
Disadvantages of Strategic Alliances
Despite the many advantages, alliances have limitations. First, it may result in conflict between workers. Due to organizational cultural differences, employees may fail to integrate hence, limiting the organization, success. Each organization has a unique culture due to the difference in leadership style and employees’ policy. The second disadvantage is lack of control. After a strategic alliance, organizations may lose some aspects of independence in their internal affairs. For instance, an organization cannot make a significant decision without consulting its partner. Finally, mergers may result in an unequal benefit. If the contractual agreements were not elaborate enough, one of the partners might end up benefiting more than the other benefits.