What are the Strategic Alliances?
A strategic alliance is a type of agreement between two companies to reap the benefits of a particular project mutually, wherein, both agree to share resources and thus result in synergy to execute the project thereby resulting in higher profit margin. In addition, both companies retain their indepdence outside the scope of the project.
- Starbucks and TATA in India.
- Maruti and Suzuki
- Spotify and Uber
- Google and Luxottica
Types of Strategic Alliances
It is of three types: each one is listed and explained with an example below:
#1 – Joint Venture
Two companies coming together to form a strategic alliance is said to be a joint venture when alliance results in a new child company. Suppose two companies X and Y combine to form an alliance resulting in a new company XYZ. It is said to be a JV. Depending on the partnership in the alliance, JV can be 50-50 JV or a majority-owned venture.
Example: Google and NASA together developing google earth, TATA, and SIA together joint ventured into forming Vistara airlines in India, Mahindra-Renault also formed not so popular and unsuccessful JV in the automobile sector.
#2 – Equity
Equity strategic alliance is when one company buys a significant amount of equity in another company. Suppose the company buys 45% of the equity in a target company, and this trade will give the acquiring company significant influence in Target Company. Both companies are said to have formed an equity strategic alliance.
Example: Panasonic, in collaboration with Tesla motors (2009) for using their batteries in the car, Walmart had invested in Indian e-commerce giant Flipkart.
#3 – Non-Equity
A non-equity strategic alliance is a type of alliance when two companies agree to share resources to result in synergy.
Example: Partnership between Starbucks and Kroger, Maruti-Suzuki alliance in India.
- Forming a strategic alliance is proven to be profitable as it results in economies of scale if properly planned and executed.
- Often to compete with the best player in the industry, any of the two other players will ally.
- In an industry where the risk is high due to the nature of the business, two-player form alliance to mitigate the risk. It is the most suitable strategy when a company wants to enter a new market.
- They often produce synergy and technical upgrade of skills which will improve the business process.
- In a market where the competition is cut-throat or very high, the strategic alliance will help the companies deal with competitiveness.
- Build brand awareness by using the goodwill of any of the already established companies.
Risks Associated with Strategic Alliance
Forming an alliance has it’s own cons/risks associated with it; they are listed below.
- There are often hidden costs that may not be visible initially, which will hamper the profitability, or there may be financial difficulties.
- It is challenging to manage the newly formed entity, as there will be institutional and cultural differences.
- Any actions taken outside the agreement can affect the relationship and, thus, the trust of companies forming the alliance.
- Data confidentiality is at risk as both participating companies will share sensitive information and can be easily misused.
- A company that has commanded in an alliance can misuse its position and thus deviating from the actual purpose of the alliance.
- There may be quality issues related to the production of goods from an effectively formed alliance.
- Due to alliance, a company with a better say in a particular process may lose control of the operation to the stronger company in the alliance.
- The cultural difference may be difficult to contain in the newly formed entity.
- It is usually a difficult task for employees to determine the actual partnership goals in an alliance.
- Two partners in an alliance might recognize that each other are not an ideal match to form an alliance.
- There may be differences of opinion among the partners regarding business decisions.
- The synergy resulting from alliances can produce an effective way of manufacturing and increase operating profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance..
- Alliance can save a lot of funds which could incur due to research of a product or other manufacturing-related research.
- Sharing resources can lead to the optimization of resources, thus leaving less or none resources idle.
- To enter a new market where brand awareness is less, the alliance will come in handy and has its importance,
- Whenever a company lacks technical expertise, an alliance can help get the same from another company.
- Alliance can be cost-effective due to the optimum utilization of resources and properly strategizing the business plan.
- Due to powerful partners in an alliance, another company may lose its operational control of the business.
- Inefficient planning of alliance can incur more loss than the actual loss without alliance and thus affect the profitability.
- It is challenging to keep the objectives of the alliance updated over a period of time.
- There will be management discrepancy due to executives from both the partnering firms.
- Optimum resource allocation is a crucial step. If not executed properly, it will hamper profitability.
A strategic alliance is two companies coming together to do business effectively, and both benefit from the same. There are various types of alliances that are discussed above, and each one has its usage and importance. Businesses should be properly aware of these alliances and choose between the available options.
Parties involving in an alliance will benefit from it in terms of effective business process or entry to a new market or optimum resource utilization. Thus it is a boon in running a business, and a company should be aware of both pros and cons before finalizing and zeroing on alliance strategy.
The Objectives of the alliance should be defined clearly. Apart from this, the firm has to be selective in choosing the partner looking at the bigger picture so that over a period of time, everything runs smoothly, and business is not affected.
This article has been a guide to strategic alliances and its definition. Here we discuss the top 3 types of the strategic alliance along with examples, reasons, and associated risks. You may learn more from financing from the following articles –