Strategic alliances are an agreement between two or more parties to achieve a set of agreed goals while maintaining the independence of organizations. They, as a rule, do not reach legal and corporate partnerships. Companies form an alliance when each of them has one or more business assets and can share business experience with each other.
Definition for Joint Ventures
Strategic alliances are an agreement between two or more parties to share resources or knowledge for the benefit of all parties involved. This is a way to supplement internal assets, the ability to access necessary resources or processes from external players: suppliers, customers, competitors, brand owners, universities, institutes and government departments.
Joint venture definition
The agreement between the two companies that decided to share resources for the implementation of specific mutually beneficial projects is strategic alliances. They are less involved and persistent. Each company retains its autonomy, gaining new opportunities. A strategic alliance can help an enterprise develop a more efficient process, enter a new market and increase its competitive advantage.
Historical development
Some analysts may say that strategic alliances are a recent phenomenon, but in fact, cooperation between enterprises is as old as the existence of the organizations themselves. Examples are early lending institutions or trade associations such as the Dutch guilds. Strategic alliances have always existed, but over the past two decades they have developed very rapidly, moving to the international level.
In the 1970s, the focus of alliances was product performance. Partners sought to achieve the best quality of raw materials at the lowest possible price, improved technologies, faster penetration into the market. But the focus was on the product.
In the 1980s, strategic alliances focused on the economy. The involved enterprises tried to strengthen their positions in the relevant fields. During this time, the number of alliances has risen sharply. Some of these alliances have led to great success with products such as Canon copiers sold under the Kodak brand. Or the Motorola / Toshiba international partnership, the pooling of resources and technologies of which led to great success with microprocessors.
In the 1990s, the geographical boundaries between markets collapsed. Higher demands on companies have led to the need for continuous innovation. The focus of strategic alliances has shifted to developing abilities and competencies.
Vertical Alliances
This is a collaboration between a company and its upstream and downstream partners in the supply chain. Such alliances are aimed at intensifying and improving these relations, as well as expanding the network of companies and the ability to offer lower prices. At the same time, suppliers are involved in design and distribution solutions. An example of a strategic alliance of this type is the close relationship between car manufacturers and their suppliers.
Horizontal Alliances
Formed by firms operating in the same business area. This means that alliance partners used to be competitors. They began to work together to improve market power compared to other competitors. Collaboration of research and development of enterprises in high-tech markets - these are horizontal alliances. An example is the alliance between logistics service providers. Such companies receive double benefits:
- access to material resources that can be directly used (expansion of common transportation networks, warehouse infrastructure, provision of a more complex package of services);
- access to intangible resources that cannot be directly used (innovation and know-how).
Intersectoral Alliances
They are partnerships in which participating firms are not connected by a vertical chain. They do not work in the same field of business, do not come into contact with each other, have completely different markets and know-how.
Joint ventures
In this case, two or more companies enter into a partnership agreement to create a new enterprise. It is a separate legal entity. Forming companies invest capital and resources. New businesses can be formed for a limited time for a specific project or for long-term business relationships. Control, income and risks are distributed according to deposits.
Equal Alliances
It is a form of strategic alliance in which one company acquires a stake in another company, and vice versa. This makes companies each other's stakeholders and shareholders. The acquired share is insignificant, therefore, the selling company retains the right to make decisions. A similar situation is also called cross-shareholding and leads to complex network structures. Companies that are connected in this way share profit and have common goals. The desire for competition is reduced. In addition, it makes it difficult to accept orders from other companies.
Disparate Alliances
They cover a wide field of possible cooperation between companies. This can be close cooperation between the customer and the supplier, outsourcing of certain corporate tasks or licensing. Such an alliance may be informal, which is not indicated by the contract.
Target typology
Michael Porter and Mark Fuller, the founders of Monitor Group of strategic alliance, split alliances according to their goals:
- Operational and logistics alliances. Partners either share the costs of introducing new industries, or use the existing infrastructure owned by a local company in foreign countries.
- Marketing, trading and service alliances. Companies use the existing marketing and distribution infrastructure of another company in the foreign market to distribute their own products.
- Technology Alliances. These are consolidated research and development departments, agreements on the simultaneous development, agreements on the commercialization of technologies, license agreements. As a rule, these are international strategic alliances.
Additional views
These types of strategic alliances include:
- Cartels. Large companies can collaborate informally, controlling production and prices within a specific market segment or business and restraining their competition.
- Franchising. He gives the right to use his partner brand name and corporate concept. The other party pays a fixed amount for this. The franchisor retains control over pricing, marketing and corporate solutions in general.
- Licensing. One company pays for the right to use the technology or production processes of another company.
- Industry standard groups. These are groups of large enterprises that are trying to ensure compliance with technical standards in accordance with their own production interests.
- Outsourcing One side pays the other for performing production steps that are not part of the core competencies of the firm.
- Affiliate marketing. This is a web-based distribution method in which one partner provides the opportunity to sell products through their channels in exchange for predetermined conditions.
Using their enterprises, they build their activities.
Value
The main goals of strategic alliances:
- making single decisions;
- flexibility;
- acquisition of new customers;
- Strengthening strengths and eliminating weaknesses;
- access to new markets and technologies;
- shared resources and risks.
You must take them into account when working.
Examples of international alliances
International strategic alliances include the Du Pont / Sony partnership. It consists in the development of optical memory. Motorola / Toshiba is a joint microprocessor manufacturer. General Motors / Hitachi is a partnership to develop electronic components for cars. Fujitsu / Siemens manufactures and sells computer products. Apple / IBM - This partnership combines analytics and enterprise computing with the elegant user interface of iPhones and iPads. Google / Luxottica is a brilliant collaboration that produces Google smart glasses. Leica / Moncler - The alliance is described as the perfect union of aesthetics and technology. It was created to produce branded cameras.
Innovative alliance
Marks Spencer / Microsoft - this partnership will enable both organizations to jointly explore the possibilities of using technologies such as artificial intelligence in retail to improve the quality of customer service and streamline operations. Microsoft's world-class engineering team will work with the M&S retail lab team. Partnership is based on a new technological approach. Steve Rowe, CEO of Marks Spencer, called this enterprise the first digital retail. The strategic agreement was signed on June 21, 2018 in London.
Success factors
The success of any alliance largely depends on how effective the capabilities of the enterprises involved are and whether each partner’s full commitment to the alliance is achieved. There is no partnership without compromise, but the benefits should outweigh the cons. Poor alignment of goals, performance, and clash of corporate cultures can weaken and limit the effectiveness of any alliance. Some key factors that must be considered in order to be able to manage a successful association include:
- Understanding. Collaborating companies need a clear understanding of the resources and interests of potential partners, and this understanding should be the basis of the alliance's goals.
- Lack of temporary pressure. Managers need time to establish working relationships with each other, develop a time plan, establish milestones and develop communication channels. The hasty signing of a cooperation agreement could hurt alliance members.
- Alliance restriction. Some incompatibility between enterprises may not be avoided, so the number of alliances should be limited by the required number, which will allow companies to achieve their goals.
- Good connection. Managers of large firms must be very well connected to be able to integrate different departments and business lines across internal borders. They need legitimacy and support from senior management.
- Building trust and goodwill. This is the best basis for mutually beneficial cooperation between enterprises, as it increases tolerance, intensity and openness of communication and facilitates collaboration. In the future, this leads to equal and satisfied partners.
- Intensive relationship. Intensification of partnership leads to the fact that partners better know each other. This increases confidence.
The risks
The use and functioning of strategic alliances brings not only opportunities and benefits. There are also risks and limitations that need to be considered. Some of the risks are listed below:
- the partner is experiencing financial difficulties;
- hidden costs;
- ineffective management;
- activities beyond the scope of the original agreement;
- information leak;
- loss of competence;
- partner product or service failure;
- loss of operational control;
- the partner cannot or does not want to provide key resources.
Failures are often explained by unrealistic expectations, lack of commitment, cultural differences, divergences in strategic goals and lack of trust. To avoid them, it is necessary to carefully consider all aspects of cooperation.