Strategic alliances: how they work in business, with examples (2023)

What is a strategic alliance?

A strategic alliance is an agreement between two companies to undertake a mutually beneficial project while each retains its independence. The agreement is less complex and less binding than aconsortium, where two companies pool resources to create a separate business entity.

A company may enter into a strategic alliance to expand into a new market, improve its product line, or develop an advantage over a competitor. The agreement allows two companies to work towards a common goal that will benefit both. The relationship can be short or long term.

Understand strategic alliances

At the center of strategic alliances are companies that are striving to be better but may not have the resources to embark on certain ventures. Rather than trying to create market opportunities for themselves, companies can look to existing resources to tap into personal growth.

Consider Uber's huge customer base. While Uber may have an interest in making the ride experience as robust as possible, it may not be feasible for the company to build its own music repository with technological resources to play only on demand. For this reason, Uber turned to Spotify to establish a strategic alliance.

On the other hand, Spotify can boast of a strong technological product. However, you can look for opportunities to reach a broader consumer audience (which is exactly what Uber has to offer). By forming a strategic alliance in which Uber provides the customers and Spotify provides the technology, the two companies have come together to create a market opportunity that neither entity could have achieved alone.

Types of strategic alliances

There are three main forms of strategic alliances. These three types of strategic alliances vary in the degree of financial investment that each company makes in the agreed joint effort.

Consortium

AconsortiumIt occurs when two companies agree to merge to create a completely new and separate company, of which each of the existing companies becomes the parent.

In 2012, Microsoft and General Electric Healthcare signed a joint agreement to create a new third company called Caradigm.Caradigm was created to develop and commercialize an open healthcare intelligence platform. The idea behind the joint venture was that Microsoft had the technical ability to make this platform work, while GE's healthcare IT division had the expertise on the healthcare side.

Strategic Capital Alliance

Aown capitalthe strategic alliance may have performance objectives similar to those of a joint venture; however, it is financed differently as one company makes an equity investment in another.

In 2010, Panasonic invested $30 million in Tesla.The purpose of the investment was to help build a stronger alliance between the two companies and accelerate the expansion of the electric vehicle market. As one of the world's leading battery cell manufacturers, Panasonic's skill set was a strong match for Tesla's ambition to incorporate proprietary packaging using cells from multiple battery suppliers.

Inequitable Strategic Alliance

A non-equity strategic alliance is formed when two entities perceive that there is mutual benefit and that a capital transfer is not required. As discussed below for Barnes & Noble and Starbucks, each alliance member simply contributes their resources to the alliance for the other party to take advantage of. A simpler contractual obligation is agreed for the two entities to pool resources and capabilities.

How do strategic alliances create value?

There are many reasons why a company may choose to enter into a strategic alliance. These reasons may include, but are not limited to:

• Improve short-term finances.Companies that want to make an immediate financial impact may find it easier to leverage another company's resources to improve their market position in the short term.
• Elimination of entry barriers.Companies may not have capital available to enter certain markets. Instead, they can use companies that have already made these investments for cheaper and faster access.
• Get better business insights.Companies may have no idea how a givenbusiness modelcan do. Instead of having to build an entire model and self-finance an experiment, companies can take advantage of strategic alliances to "test" how certain situations might play out and use that information for future decision making.
• Shared financial risk.If a business fails, both parties to a strategic alliance are likely to help pay for those losses. Instead of being solely responsible for failure, both parties can receive mutual assistance as part of the alliance agreement.
• Innovate beyond current capabilities.In the aforementioned Panasonic/Tesla alliance, this partnership created an innovative and cutting-edge agreement that brought together some of the smartest EV battery experts on the same team.

How to find a strategic alliance

Forming a strategic alliance requires creativity, vision of the future and good business sense. While many strategic alliances are not the same, each is based on common steps outlined below.

• Brainstorm potential partners.There are usually strategic alliances between companies from different sectors. Consider other businesses that may need your services or have a weakness where your business has a strength. On the other hand, consider the weaknesses of your own company and what types of entities can provide you with resources to help you fill your void.
• Draft Partnership Proposals.Strategic alliances must make sense to both parties; otherwise, one of the parties may not agree to the alliance if they feel it does not benefit them. Thus, you can find a strategic alliance by craftingfinancial budgetsand strategies. Then propose these plans to companies to gauge their interest. Companies are more likely to find a strategic alliance when the other company is receptive to an idea that has a proven plan to benefit both parties.
• Determine Goals.All parties to a strategic partnership must provide information about what the alliance's revenue, profit, and operating strategy will be. These goals should be well documented and include language about what should happen if either party fails to comply with the partnership agreement.
• Prepare the Plan.Once all parties are on board to form a strategic alliance, the formal plan is presented. This usually results in a series of legal documents outlining the contract between the two entities. This plan also acts as a road map for future decision making as the newly formed alliance moves forward.

Advantages and Disadvantages of a Strategic Alliance

Advantages of a strategic alliance

A strategic alliance allows a company to take advantage of opportunities that it could not otherwise take advantage of. This includes gaining new customers, getting involved in different markets, or selling different products. Each of these paths has the potential to increase a company's revenue and profitability.

Strategic alliances are also a way to diversify a company's activities.income streamand generate different opportunities to mitigate the financial risk of the entire company. Risk is also mitigated with the help of alliance members, as each entity may have resources that can be used to solve unique challenges or navigate unfamiliar business scenarios.

Finally, strategic alliances allow a company to operate differently than it normally would. That means using resources you don't have. This could be physical assets, access to markets, or labor with specific expertise. It can also mean that the company can take advantage of another company's market presence to gain a more positive public perception of its own company. Entering into an alliance with a company with a strong public reputation helps build brand trust and recognition of your own entity.

Cons of a strategic alliance

A strategic alliance is more likely to be successful if there is strong communication. This means that both parties must continually expend resources to manage the alliance to ensure that both parties agree. If the transmission of information or strategy fails, it will be more difficult for the alliance to succeed.

While strategic alliances may seem fair and romantic, they are often not equally balanced. One company will almost always naturally benefit more than the other, and there may not be a simple solution to balance trade. You can also develop an unnatural dependency on one side or the other in terms of the resources consumed or the experience you draw on.

Just as a strategic alliance can help improve a company's public image, a transgression by an allied company can cause harm. The reputation of one company may depend on the other, although they have no control over how the other company behaves in public. A similar difficulty can exist if there are conflicts between the members of the alliance; If there are strategic disagreements, resources may be wasted resolving interpersonal conflicts that would not exist without the alliance.

Examples of Strategic Alliances

The deal between Starbucks and Barnes & Noble is a classic example of a strategic alliance. Starbucks brews the coffee. Barnes & Noble stocks the books. Both companies do what they do best while sharing space costs for the benefit of both companies.

Strategic alliances can come in many shapes and sizes:

• An oil and natural gas company may form a strategic alliance with a research laboratory to develop commercially viable recovery processes.
• A clothing retailer may form a strategic alliance with a single manufacturer to ensure consistent quality and size.
• A website can form a strategic alliance with an analytics company to enhance its marketing efforts.

Conclution

A strategic alliance is an agreement between two parties for their mutual benefit. Each side usually provides some type of resource that it allows the other party to use; By collaborating with another entity, both parties benefit in some way.