Competitive advantage drives profitability for many businesses today. One way that companies can gain a competitive advantage is by forming strategic alliances. If you have reached a point where you feel that your regional or global company is losing to competition, as signified by dropping profits, perhaps it is time to consider joining forces with a foreign company of similar market presence and size located where you are already doing business or would like to. One reason for building such a business arrangement is to improve the competitive position and performance of both firms by pooling resources together.
However, before you move ahead, it is important that you understand how strategic alliances work, how to form them, and whether they are worth it. This article highlights the various types of strategic alliances, why it is important in building a strategic alliance, and how to build a successful one.
What Are Strategic Alliances?
A strategic alliance is an agreement between two or more independent companies to cooperate in the development, manufacturing, or sale of products and services. The alliance is often established when a firm wants to edge into a related business or a new geographic market, and in particular, where the government wants to protect the domestic industry from imports. The alliance involves two or more companies, each based in its home nation, for a specified time period. The main purpose is sharing the ownership of the new company and combining resources to maximize competitive advantages.
The cost is in most cases shared equitably among the companies involved and is a cheap and fast way of exporting goods to the overseas market. However, it is much more expensive for the acquiring company. Even though global strategic alliances work well for business expansion, an acquisition is recommended for an instant penetration in the overseas territory.
An alliance is even more flexible regarding the degree of control of the companies involved. Depending on the resources involved, the companies can structure the strategic alliance into a non-equity or equity partnership. There are various types of strategic alliances as highlighted below.
A joint venture is usually formed when the parent companies establish a new child company. Essentially, this happens, if for example, Company A and B form a joint venture, creating Company C. If the start-up contributions are the same, it is known as a 50-50 Joint Venture, but if one contributed more, for example, Company A 60% and Company B 40%, this is classified as a Majority-owned Venture.
Equity Strategic Alliance
This is typically created when a company buys a certain equity percentage of the other company. If Company A buys 30% of the equity in Company B, it results in the formation of an equity alliance.
Non-equity Strategic Alliance
This is created when two or more companies sign a contract to pool their resources and capabilities together.
Why Build a Strategic Alliance?
For an accurate delineation of the importance of strategic alliances, we consider product life cycles—slow, standard, and fast cycles. The cycle is determined by the need to innovate and continually create new products in an industry. For instance, the pharmaceutical industry operates a slow product life cycle while software firms operate with a fast product life cycle. For companies using different product life cycles, the reasoning for a strategic alliance is different.
In companies operating in a slow cycle, the company’s competitive advantage is shielded for a longer time period. For instance, the pharmaceutical industry operates in a slow cycle so the products aren’t developed yearly and the patents last longer. The alliance could be formed so that one company gains access to a restricted market, maintaining its market stability and establishing a franchise in a new market.
For companies that have adopted a standard cycle, products are launched after every couple of years and may or may not maintain their leading position in the industry. The alliance helps gain market share by trying to push out other companies, pooling resources for larger capital projects, gaining access to complementary resources, and establishing economies of scale.
For the fast cycle corporations, their competitive advantages aren’t protected and they constantly need to develop new products for survival. The strategic alliance speeds up the development of new products and services, overcome uncertainty, and streamline market penetration.
The alliances are usually built for value creation, which is achieved by:
- Easing market entry and exit
- Changing the competitive landscape
- Making improvements to current operations
Changes to the competitive landscape are facilitated by:
- The creation of technology standards (for instance, Panasonic and Sony announced to work together in the production of a new-generation TV)
- Creation of a tacit collusion
Improvements to operations are because of:
- Achieving economies of scale from successful strategic alliances
- The capability of learning from the other partner(s)
- Sharing of costs and risks between partner(s)
The alliance eases entry and exit of companies via:
- Adopting a low-cost entry into new industries
- Adoption of low-cost exit from industries, where a new firm making entry forms a strategic alliance with an already established firm, allowing the existing firm to exit
Advantages of Alliances
How to Build a Successful Strategic Alliance
We recommend the following five steps:
Set an Alliance Strategy
Setting an alliance strategy is a critical step. If you do not follow your strategy in setting the partnership, you will have to use someone else’s, which could be risky for your company. The alliance comes from a business strategy and should be formed by following a structured and disciplined process. Therefore, it is best when it is formed by the business team and an objective third party. The strategy should address the vision of the partnership after a careful competitive assessment and market analysis. Set a strong organizational culture.
This is dependent on the criteria that were chosen in the strategy session. Once the business team selects a partner, it should determine whether the two companies are culturally compatible and strategically aligned. A joint strategy session will then be set to articulate the joint strategy and vision. In this session, it will become clear whether the two companies are compatible with the alliance. It also provides an opportunity for the identification of strategic gaps and unanticipated opportunities. All deal-breakers are stated and brainstormed at this stage.
Structure the Alliance
This stage demands the greatest attention as it entails structuring and negotiating the financial and legal ramifications. However, it is not worth entering into if a consensus can’t be reached in the first two stages. Keep an open mind regarding the structure and avoid biases when negotiating. It is vital to clear out the deal-breakers when negotiating. So make sure you develop a negotiation strategy, starting from when your team first approaches the potential partnering company. Ensure that the exit strategy and governance are laid out in the contract.
Managing the Alliance
When a deal is reached, making the relationship work is an ongoing challenge. Therefore, an implementation plan should be developed before the deal is signed. In addition, a full launch strategy should be agreed on before announcing the deal. Conflicts in the alliance are inevitable and ensuring that there is a conflict-management process is vital. Periodic checks should be done so that partners do not deviate from the agreement or strategy.
Re-evaluate the Alliance
The results of the alliance should be measured on a regular basis to determine if the alliance is achieving the intended objectives. The metrics used should include quantitative and qualitative criteria. Qualitative metrics should include aspects like trust and the willingness for collaboration and cooperation. Quantitative metrics should be clear and specific and coincide with how each organization sets the standards for performance.
Strategic alliances are very important for companies. Both of the partnering companies usually benefit from the move. Alliances involve two or more companies with an intention of sharing the ownership of the new company to maximize competitive advantages. The alliances help in value creation, which is achieved by easing market entry and exit, changing the competitive landscape for the better, and making improvements to current operations. Businesses benefit from instant market access, an increase in sales and profits, pooling together resources, and mitigating the risk of failure.
However, not all alliances are successful, and both companies’ business teams should come to a consensus on the structure, objectives, and strategies to adopt. We hope this article has adequately addressed the various strategic alliances, why they are important, and how to build them successfully.