Strategic Alliances

What Are Strategic Alliances?

Strategic alliances are collaborations between two or more organizations or business divisions that collaborate to accomplish mutually beneficial strategic objectives.

The strategic partnerships approach has immense potential. It can significantly improve an organization's operations and competitiveness if done appropriately. Recent research conducted by Anderson Consulting indicates that 82% of executives feel that alliances will be a key growth driver in the future.

Companies are forging partnerships to obtain technology, gain access to certain markets, decrease financial risk, reduce political risk, and attain or ensure competitive advantage.

These are gaining prominence within the global economy. In the past decade, the number of strategic partnerships has nearly doubled, and this trend is anticipated to continue.

Over the previous two years, more than 20,000 business unions have been created worldwide, and the number of groups in the United States has increased by 25% annually.

Not all alliances, meanwhile, are regarded as "strategic." There are five accepted factors to use when determining whether a potential relationship is strategic for your business. If even one of the following requirements is met, a strategic alliance may be taken into consideration:

1. In order to achieve the primary business objective, cooperation is required. In other words, whether or not the partnership is active will significantly affect whether the objective is achieved.
2. Collaboration is necessary to create or maintain any aspect of a business that gives it a competitive edge.
3. The alliance strengthens the ability to counter threats from competitors.
4. The collaboration facilitates, supports, or upholds strategic decision-making.
5. The partnership significantly reduces risk.

Understanding Strategic Alliances

It is a voluntary, formal agreement between two or more parties to combine their resources to pursue a common set of goals that satisfy vital needs while remaining separate entities. 

In this formation, products, services, procedures, and processes are exchanged, shared, or co-developed.

The overarching objective is to sustain long-term competitive advantage in a rapidly changing world, for instance, by reducing costs through economies of scale.

It can also be achieved by boosting research and development efforts, increasing access to new technology, entering new markets, reviving sluggish or stagnant markets, reducing cycle times, enhancing quality, or impeding competitors.

Strategic Partnership Process

The process of forming a strategic partnership often entails the following key steps:

• Strategy development: At this stage, the potential for a strategic alliance is assessed in light of the goals, significant problems, and resource allocation plans for the production, technology, and workforce. The alliance's and the company's goals must be compatible.

• Partner evaluation: In this phase, prospective partners for the strategic alliance are examined in order to choose a suitable business with which to collaborate. 

  • A business must be aware of the alliance partner's advantages, disadvantages, and reasons for joining.  Additionally, appropriate partner selection criteria are identified, and plans are created to accommodate the management style of the partner.

• Contract negotiations: These begin once the ideal partner for an alliance has been chosen. First, everyone engaged talks about whether their aims and objectives are doable and reasonable. 

  • The roles of each member in the alliance, including contributions and rewards, penalties, and protecting corporations' interests, are determined by special negotiation teams.

Why Are Strategic Alliances Important?

Alliances provide partners with temporary and more flexible access to one another's resources than mergers and acquisitions. 

Two interrelated but distinct reasons for a company to contemplate forming a group are to acquire the resources of others and to keep and grow its resources by combining them with those of others. 

It is crucial for market expansion, access to technology, business diversification, restructuring, resource concentration, product, standard development, market complementarities, etc., and future business expansion.

Access to the distinctive expertise of the business you are collaborating with is another crucial advantage of a strategic partnership. Technical know-how and marketing strategy are two examples of information that companies in an alliance share.

These days, effectively managing an alliance means not only dealing with internal difficulties but also managing the alliance's daily struggle with rivals and risk management, which has spread to every department within the organization. 

Equity-based alliances have expanded considerably in the last few years, while acquisitions have dropped during the last decade. 

For instance, Bookshop X and record label Y have entered into a strategic alliance. By obtaining access to one another's markets, the two alliance partners can each increase the scope of the products they offer.

Types of Strategic Alliances

There are two types of alliance formations: equity and non-equity.

Equity Alliances

Generally, equity associations take the form of equity ventures, which are independently incorporated entities jointly owned by the partners. 

Equity ventures are formed to integrate the joint efforts of partners substantially and are the most effective collaboration form for the transfer of implicit knowledge between partners because partners are exposed to each other to a major degree. 

Non-Equity Alliances

Non-equity alliances are agreements between companies to pool their resources without establishing a new business or distributing equity.

In comparison to equity-based partnerships, non-equity partnerships are usually looser and less formal. These make up the majority of corporate partnerships.

One can separate non-equity coalitions into unilateral contract-based collaborations and bilateral contract-based coalitions. 

1. Unilateral contract-based collaborations: When there is a well-defined transfer of property rights, as in R&D and licensing agreements, partnerships are formed based on unilateral contracts. 
   • Such unilateral partnerships are founded on contracts that are typically exhaustive and explicit, and partners carry out their commitments alone, with little coordination or collaboration. 
2. Bilateral contract-based associations: Bilateral contract-based associations, on the other hand, need partners to collaborate continuously, as in collaborative R&D, production, and marketing. These relationships include the continuous generation of property and expertise for the parties. 
   • Bilateral contracts are typically incomplete and more ambiguous than unilateral contracts, and the parties are normally required to allow their cooperative relationship to develop through experience.

Advantages of strategic alliances

There are numerous advantages and positive aspects of the same, which are mentioned in detail below.

Additional Resources

Companies can acquire supplementary resources, such as goods, information, or other assets, through these alliances without having an impact on their core activities.

Every business has a specialty, and the majority want to concentrate on those areas. If you can bring the best of each partner's strengths together to create something that is greater than the sum of its parts, business partnerships can achieve exponentially greater heights.

You may frequently adapt and apply the lessons you learn from the experience of one organization to your own.

Exploring New Markets

One of the most frequently cited grounds for these alliances is opening up access to a new market. When a new product, activity, or marketing campaign is being introduced, this is very typical.

Exciting and exclusive offerings made in collaboration with a partner can help both businesses grow their markets.

Increased Clients

It is typical for businesses to receive public recognition from their alliance partner. In reality, businesses frequently select business partners based on their position in a different market or their regional clout.

Due to the enhanced visibility brought about by a strategic partnership, both firms get access to a wider audience of customers.

Dynamic Expansion

A strategic partnership provides the benefit of having twice the workforce, skill set, expertise, and other variables. Your aims may be instantaneously accomplished much more swiftly and successfully.

However, because the costs and risks are also shared, a strategic partnership's informal nature makes it a good way to test a theory in less time and at a lower cost. 

A Stronger Understanding Of The Brand

Strategic partnerships can help you grow into new markets and clientele while increasing brand recognition. Working with a business that has a solid reputation will enhance your own by association.

Disadvantages of strategic alliances

There are several potential risks connected with forming an alliance that should be carefully evaluated before choosing this course of action, as explained in detail below:

Looking For A Compatible Partner Is Time-Consuming

Most of the work involved in creating an alliance is spent finding the right partner. Spend some time locating a spouse who is committed to maximizing the partnership and who shares your aims and values.

Do they have the same time and resources to contribute? Do they enjoy a good reputation? It could be difficult to work as a cohesive team in a strategic alliance if you and your partner don't always share the same opinions.

The Difference In Management Styles

The only way a strategic partnership can be successful is if both parties are willing to cede some authority. You're committing to sharing responsibilities and resources, and different businesses run in different ways. 

When partners originate from different cultures or countries, this could be more noticeable.

At the outset, be clear about your expectations and include any novel suggestions. After that, stay in constant contact to monitor how the collaboration is progressing.

The ultimate goal of a strategic partnership is to achieve the best outcomes for both sides, not just for you.

Lack Of Trust

In a strategic partnership, both parties must exchange a specific amount of information and resources. To do this, a base of mutual faith and trust must be built.

There are situations when a business willfully withholds or falsifies knowledge that could have a substantial influence on the collaboration. Or a partner can join the partnership with great zeal but find it difficult to maintain it over time.

The other partner could feel duped in these circumstances and stop appreciating the value of the partnership.

More Accountability

Strategic alliances may increase the risk for all parties involved. A company's partner could also suffer if it mismanages its resources, experiences financial problems, or breaches its agreements.

Even if a business runs into problems beyond the purview of the strategic alliance, if those problems have any bearing whatsoever on the partnership, the partner may also be held jointly accountable.

Examples of Strategic Alliance

Some of the examples of strategic alliances are:

Uber And Spotify

The agreement between Uber and Spotify enables Uber riders to stream their Spotify playlists during rides simply. 

This personalizes the Uber experience and encourages Uber riders to subscribe to Spotify Premium (for more control of their tunes both inside and outside Uber).       

Apple Pay And Mastercard

At the launch of Apple Pay, only MasterCard customers could connect their card to an iPhone and make purchases without carrying their real card.

Target And Starbucks

There are Starbucks cafes at tens of thousands of Target shops to help fuel shoppers' trips to the retailer. And Target customers are aware that if they become hungry or thirsty while shopping, Starbucks is conveniently located within the store.

International Multi-Company Strategic Alliance

Apple, Sony, Motorola, Philips, AT&T, and Matsushita formed a strategic partnership to form General Magic Corporation to develop Tele-script communications software.

Red Bull And GoPro

Although the energy drink and camera businesses may have nothing in common, Red Bull and GoPro have a strategic partnership that is difficult to match. Red Bull and GoPro joined forces strategically in 2016.

The Red Bull and GoPro partnership, which saw Red Bull get equity in GoPro (equity form of alliance) and GoPro emerge as Red Bull's lone partner in delivering Point-of-view imaging technology for documenting Red Bull's media output and events, likewise make use of the equity type of alliance.

Both companies are the epitome of spontaneity and adventure for travelers and adventurers who carry cameras to capture the experiences as they happen.

Later, the two companies came together to develop a long-term strategic partnership for Red Bull's extreme sports competitions like the Red Bull Rampage. At these competitions, only GoPro cameras are used to record athlete point-of-view images.

The reason the Red Bull/GoPro strategic relationship is so successful is that both brands cater to audiences who seek out the thrill. Both brands now have a stronger link with high-end thrills as a result of this strategic cooperation.

Strategic Alliance for Competitive Advantage

One distinct advantage of strategic alliances is the possibility of expedited time-to-market. 

This is consistent with the concept of minimum viable transformation (MVT), which strives to lower initial investment and time-to-market through incremental product and service development that can contribute to the creation of competitive advantage.

Based on small, rapid implementations coupled with feedback and iterative learning cycles, the MVT methodology enables businesses to learn and change more rapidly.

By applying the MVT technique to a company's growth strategy, corporate development executives can utilize an agile methodology to test desired capabilities and accelerate the time to value capture. 

Increasing innovation velocity, soaring valuations, and regulatory uncertainty assist to position coalitions as valuable alternatives to mergers and acquisitions (M&A).

A good cooperation management skill is characterized by the ability to articulate a crystal-clear vision, specify growth avenues, and then establish a relationship through rigorous diligence and effective negotiation. 

Below are the phases of partnership establishment and implementation:          

1. Initial phase: The business should outline its broad strategic objectives and decide whether external groups can facilitate this strategy.
   • This necessitates close alignment between corporate strategy, business development, and functional leadership to evaluate desired capabilities and strategic decision considerations.
2. Deal development: Focuses on moving the prospective partnership from an initial examination of strategy compatibility and partner suitability to a full evaluation of the partner.
3. Alliance management: Once established, the partnership must be handled continuously. Regular monitoring of performance data should inform design modifications for collaborations.
   • This greater mobility can be a potent competitive weapon in the face of volatile markets and unforeseen disruptions.

Conclusion

In conclusion, strategic partnerships can be a successful means of swiftly disseminating breakthrough technology, entering a new market, bypassing regulatory constraints, and learning from leading enterprises in a specific industry. 

However, these are not simple to form, cultivate, and sustain.

It is advised that businesses view collaborations as an opportunity to acquire certain benefits, such as extraordinary financial and human resources, increase in market power, an increase in competitive advantage, and the potential to expand the market.

Frequently, the efforts fail due to management's tactical blunders. By utilizing a well-managed strategic partnership agreement, businesses can profit in industries that would be unprofitable otherwise.

To form a successful group, considerable time and effort must be expended by all parties involved. Firms must enter into this with a precise plan, including expectations, requirements, and anticipated rewards.

A positive relationship with the partner, mutual trust, a minimum level of commitment between the parties, and clear objectives and strategy is demonstrated to be the most significant aspects influencing alliance success.

Strategic partnerships benefit customers by providing a convenient one-stop shop with a broad range of services. 

Customers can get specialized knowledge and talents for a small portion of the market price. Additionally, they gain from referrals and cross-promotion from alliance partners.

Alliances provide the additional benefit of lowering capital requirements and hence lowering risk, in addition to enhancing strategic optionality and speeding up the time to value capture.

Researched and authored by Prachee Rajvanshi I Linkedin

Reviewed and edited by Tanay Gehi | Linkedin

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