Strategic Alliance Definition
Strategic Alliance refers to an agreement between two or more companies wherein they agree to work towards common project or objectives while maintaining their independence.
A strategic alliance is entered into by the companies to carry on projects which are beneficial for all the participating companies. The participants either own business assets or have a requisite experience that is expected to benefit the other participants. The same is entered into when all the participants have common objectives and wish to obtain long term benefits. This arrangement is entirely different from partnership, agency or corporate and each party maintains their independence.
Types of Strategic Alliance
Following are some types:
#1 – Joint Venture
A joint venture is created when two or more companies create a new company. The resultant new company is a separate legal entity altogether. The founder companies contribute to equity as well as know-how and revenues as well as related risks are shared following contributions.
#2 – Equity
In such kind of arrangement, one company invests into the equity of another and vice versa. As a result, shareholders of one company also become the shareholders of another. Only a minority interest of equity is acquired and the majority shareholding remains the same.
#3 – Non-Equity
In this arrangement, companies agree to pool in their resources and experiences.
#4 – Horizontal
It is formed by companies that are engaged in similar businesses. Thus, companies belonging to the same business area come together and gain a competitive edge by improving their market share.
#5 – Vertical
It is an arrangement between a company and its upward or downward participants of the supply chain. In other words, it is an arrangement between a company and its distributors.
#6 – Intersectional
In such kind of arrangement, neither of the parties is connected. As such, they are neither in the same business areas nor are they part of the same supply chain.
An example of a strategic alliance is an alliance that took place between Apple Pay and MasterCard. MasterCard is one of the leading credit card providers, and to share the benefits of the credibility of MasterCard, Apple collaborated with MasterCard. Simultaneously, MasterCard also enjoyed benefits, by becoming the first authorized option of Apple Pay.
Does a question arise as to why do companies enter into strategic alliances? Well, they do so for attaining the following benefits.
- Gaining access to new clientage, which it did not have as a standalone entity.
- Enjoying the benefits related to strengths and experiences that the other party possesses.
- Sharing of the risks associated with the projects.
- Getting access to new technology, that is introduced by another party.
- Arriving at a common solution for a project or situation with shared resources and risks.
However, it may become difficult to operate owing to the following challenges.
- The other party may be not equally committed to the arrangement.
- There may be some hidden costs associated with the arrangement.
- Management of either party may be inefficient.
- One party may be in a position to abuse his power over the other.
- A party may not be willing to share its prime resources.
Strategic Alliance vs Joint Venture
A joint venture is created when two or more companies set up another company. The founder entities do not remain to work independently. The resultant company has a separate legal entity and there exists a formal contract to the joint venture. The objective with which a joint venture is created is to minimize the risks.
Strategic alliance is an arrangement where two or more companies come together to work jointly to reach a common solution. There may or may not be a formal contract between the parties. However, they continue to be independent parties. No legal entity is created as a result of this alliance. The purpose of such an arrangement is to maximize the benefits.
- The parties to the alliance gain economies of scale.
- The parties get access to new technologies as well as know-how.
- It allows all the parties to bring in their competitive advantage to the alliance.
- It leads to savings in terms of research and development cost, administration and similar costs.
- It helps the parties to take care of complex situations, which may be difficult to handle independently.
- The parties can enter into new markets and gain new customers.
- It requires the sharing of resources and technical know-how, including business secrets with the partners.
- If the alliance ends, the partner may become a competitor.
- One party may be subjected to abuse of power and may have to work according to the will of the other party.
- There is additional risk in the case of foreign partners since in such cases the foreign government may try to seize the business of the other party to encourage its local companies.
It can be said that strategic alliance helps the contracting parties to obtain long term benefits to a project, along with the maintenance of their identities.
This has been a guide to a strategic alliance and its definition. Here we discuss the top 6 types, for example, reasons and challenges of the strategic alliance along with benefits and drawbacks. You may learn more about financing from the following articles –