What is a strategic alliance What are the three types of strategic alliances firms use to develop a competitive advantage?

What are the Strategic Alliances?

A strategic alliance is a type of agreement between two companies to mutually reap the benefits of a particular project. Both agree to share resources and thus result in synergy to execute the project, resulting in a higher profit margin. In addition, both companies retain their independence outside the project’s scope.

Inhaltsverzeichnis Show

• What are the Strategic Alliances?
• Types of Strategic Alliances
• Risks Associated with Strategic Alliance
• Disadvantages
• Recommended Articles
• What is a strategic alliance in business terms?
• What are the three major types of strategic alliances firms form for the purpose of developing a competitive advantage?
• What is a strategic alliance quizlet?
• What is strategic alliance advantages and disadvantages?

Examples

1. Starbucks and TATA in India.
2. Maruti and Suzuki
3. Spotify and Uber
4. Google and Luxottica

Types of Strategic Alliances

It is of three types: each one is listed and explained with an example below:

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#1 – Joint Venture

Two companies forming a strategic alliance is said to be a joint ventureA joint venture is a commercial arrangement between two or more parties in which the parties pool their assets with the goal of performing a specific task, and each party has joint ownership of the entity and is accountable for the costs, losses, or profits that arise out of the venture.read more when an alliance results in a new child company. For example, 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, a JV can be a 50-50 JV or a majority-owned venture.

Example: Google and NASA, together with developing google earth, TATA, and SIA together ventured into forming Vistara airlines in India; Mahindra-Renault also formed a not so popular and unsuccessful JV in the automobile sector.

#2 – Equity

A strategic equity alliance is when one company buys a significant amount of equity in another company. For example, suppose the company buys 45% of the equity in a target company, and this trade will give the acquiring company significant influence in the Target Company. Both companies are said to have formed a strategic equity 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 when two companies agree to share resources to result in synergy.

Example: Partnership between Starbucks and Kroger, Maruti-Suzuki alliance in India.

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Reasons

• Forming a strategic alliance is profitable as it results in economies of scaleEconomies of scale are the cost advantage a business achieves due to large-scale production and higher efficiency. read more 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 teams form alliances 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 to 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 awarenessBrand Awareness is a measure of consumer’s brand recall and brand recognition.read more 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 profitability or financial difficulties.
• It is challenging to manage the newly formed entity due to institutional and cultural differences.
• Any actions taken outside the agreement can affect the relationship and, thus, companies’ trust.
• Data confidentiality is at risk as both participating companies share sensitive information and can be easily misused.
• A company that has commanded in an alliance can misuse its position and thus deviate from the actual purpose.
• There may be quality issues related to the production of goods from an effectively formed alliance.
• Due to an alliance, a company with a better say in a particular process may lose control of the operation to the stronger company.

Challenges

• The cultural difference may be difficult to contain in the newly formed entity.
• It is usually difficult 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 ally.
• There may be differences of opinion among the partners regarding business decisions.

Advantages

• The synergy resulting from alliances can produce an effective way of manufacturing and increase operating profitabilityProfitability 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.read more.
• 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.

Disadvantages

• Due to powerful partners in an alliance, another company may lose its operational control of the business.
• Inefficient alliance planning 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 discrepancies due to executives from both the partnering firms.
• Optimum resource allocation is a crucial step. If not executed properly, it will hamper profitability.

Conclusion

A strategic alliance is two companies coming together to do business effectively, and both benefit from the same. Various types of alliances 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 involved in an alliance will benefit from an effective business process, 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 some time, everything runs smoothly and business is not affected.

Recommended Articles

This article has been a guide to strategic alliances and their definition. Here we discuss the top 3 types of strategic alliance along with examples, reasons, and associated risks. You may learn more from financing from the following articles –

• Accounting for Joint Ventures
• Joint Venture vs. Strategic Alliance
• Difference Between Joint Venture and Partnership
• Investment Partnership