A strategic alliance is an agreement between two or more independent companies to collaborate to manufacture, develop, or sell their products or services or other business objectives. Companies form strategic alliances for several reasons, ranging from entry into new markets, improving existing product lines, or getting an advantage over competitors.
The alliance allows the companies to work toward a mutually beneficial business goal while retaining their independence. The relationship between the companies can be short or long-term, formal or informal (depending upon the terms of the agreement).
Recent years have seen a marked increase in the number of growth partnerships. Reasons for this spurt in alliances include the benefits of sharing risk and pooling resources, technology confluence, deconstruction of the industry from linear value chains to industry value networks, and transfer of knowledge.
Let’s look at one strategic alliance that worked.
Related: Why Partnership Matters.
Starbucks and Barnes & Noble
When Barnes & Noble partnered with Starbucks, they prospered when many brick-and-mortar bookstores were closing shop as customers moved to purchase their books online. The presence of Starbucks within Barnes & Noble bookstores gave customers a second reason to shop for books. The ideology was simple: i.e., take a coffee break while you browse through the book stacks.
This alliance is a prime example of how Barnes & Nobles managed to stay ahead of the curve, with countless coffee shops and bookstores copying that successful idea. With digital media sales are on the rise, purveyors of printed literary works need to think outside the box to stay on top of their game.
An important aspect to note is that companies that ally might not share much in common before their partnership. One common aspect could be their customer base, e.g., people who frequent coffee shops like to read while they sip their coffee. Before getting into an alliance, both companies’ marketing teams should review the potential to determine whether the partnership will yield long-term or short-term benefits.
Why Form a Strategic Alliance?
Gaining access to another company’s knowledge and resources is one of the most common reasons for an alliance. Each company provides the skills and help the other lacks while using the coalition to gain entry into new markets.
When two companies collaborate on a project, they exchange skills and knowledge. In a typical scenario, one company brings in the technological expertise the other company needs. At the same time, that same company may need capital, new distribution networks, marketing, sales expertise, or established networks. Benefits of such collaboration include:
Improved operation through economies of scale
Successful alliances lead to economies of scale by improving existing operations. Companies rely on each other’s existing expertise rather than spending time and resources to develop something that has already been done.
Getting and sustaining a competitive edge
Traditionally, a company will try to develop much-needed skills in-house. However, like administrative or technological complexity increases, management realizes that everything cannot be done themselves. The partner company can fulfill such gaps in skill or knowledge, which has already and successfully developed and maintained those core competencies.
Sharing business risks equally.
Research and development costs are often the highest expense of a company, and the speed of innovation means that products and services become outdated faster. With no guarantee of market success, the risk of investing in the development of a new product is also high. In such scenarios, partnering with another company makes sense. They jointly bear design, manufacturing, logistics, delivery, and marketing expenses while sharing and maximizing returns.
Entry into new markets
Business alliances are the best way to enter new markets in terms of product/service niche and geography. One partner gives access to their established network and distribution systems, ensuring the product reaches the market faster and on time. When government policies act as an entry barrier, partnering with a local company is beneficial.
Easy exit from industries
Alliances also enable low-cost exit from industries. A new entrant can form a strategic alliance with a company already in the industry and slowly take over that company, allowing the company already in the industry to exit.
Strategic Alliance Categories
Strategic alliances fall into three basic categories.
Joint Venture
A joint venture is established when two parent companies collaborate to form a new “child” company. The binding agreement between the two companies maintains shared resources and equity. A joint venture has a clear, defined objective, and the profits are split as per the ownership percentage in the child company.
For instance, if Companies A and B each own 50 per cent of the child company, it is defined as a 50-50 joint venture. However, if Company A owns 75 per cent and Company B owns 25 per cent of the child company, then it is called a majority-owned venture.
Example: Alphabet + GlaxoSmithKline. Alphabet, Google’s parent company, announced its joint venture with GlaxoSmithKline to research the treatment of diseases with electric signals. The child company, Galvani Bioelectronics, continues to grow exponentially and has brought in more partners to build equipment and continue its research in the new field of bioelectronics.
Equity Strategic Alliance
In the case of a strategic equity alliance, one company purchases equity in another company, also known as partial acquisition. Or each company buys equity in each other’s business, also known as a cross-equity transaction.
Example: Tesla + Panasonic. Panasonic invested $30 million in Tesla to speed up battery technology for electric cars and other vehicles. Panasonic is also building a state-of-the-art lithium battery plant in Nevada.
Non-Equity Strategic Alliance
Here the two companies agree to share resources without creating a separate entity or sharing equity. Such alliances are usually looser and more informal compared to other partnerships that involve equity. A majority of business alliances are non-equity alliances.
Example: Project Baseline. Several alliances grew out of the original joint venture forming Galvani Bioelectronics through its pioneering project, Project Baseline. The project acted as a connected ecosystem of companies working towards an easily understandable, precise map of human health.
5 Critical Components
According to the Ivey Business Journal, a strategic alliance needs five components to succeed:
- It is critical to the success of a core business objective.
- It is key to the development or maintenance of a core competency or competitive edge.
- It effectively removes a competitive threat.
- It is essential for creating or maintaining the company’s strategic choices.
- It is necessary for mitigating significant business risks.
A well-established strategic alliance helps both partners scale quickly, develop solutions for their customers, gain entry into new markets, and merge valuable expertise and resources. An alliance is a game-changer for businesses that value both speed and innovation.
However, a strategic alliance can fail when either of the partners misrepresents what they can offer, does not execute their promises, or pools their resources.
Points to Consider Before Entering a Strategic Alliance
Loss of control
When two different business entities ally, both lose control over how their business is understood and operated. Honesty and complete transparency are a must for any type of business alliance. This takes time as well as effort from both sides.
Business liabilities may increase.
In the case of a joint venture or strategic equity alliance, both companies are looking for a successful outcome (resources, technology, new market entry, etc.). But if something unanticipated stalls production or leads to dissatisfied customers, then both the partners face the risk of losing their business reputations and customer base.
Is a Strategic Alliance Right for Your Company?
All industries are vulnerable to disruption, so business leaders try to acquire the competitive advantages necessary to keep their companies afloat, relevant, and prosperous. Entering new markets and developing new products faster may require blurring the lines between competitors.
Strategic alliances help tap into limitless possibilities, resources, and knowledge that would otherwise not be possible for anyone going solo and, at the same time, provide a shield against failed business partnerships.
