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.

A strategic alliance company benefits from sharing risks and expertise with the other enterprise. As a result, both parties involved enjoy entries into new markets, supplement each other’s core skills and develop projects. However, it is important to also understand that outside of these collaborations, both parties are independent in the rest of their business ventures.

Strategic alliance refers to the collaboration between two companies for a particular project. The companies could be experts in their respective fields and come together to solve a common problem in the market and make better gains subsequently.

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 global strategic alliance.

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 thereby, planning on a long-term range becomes a relatively easier task to execute.

Let us understand why a strategic alliance company is formed and how their process is curated with the help of a couple of examples.

Example #1

Retro Corporations, a fashion brand with a headquarters in Los Angeles and Modern & Co headquartered out of Massachusetts who manufactured customized footwear came together and formed a new brand that exclusively produced camping, hiking, and mountaineering clothes, footwear, and accessories.

Parallelly, their existing businesses kept growing at their own paces and their new collaboration concentrated on a completely new segment of the market. Therefore, the pricing, marketing strategies, and budgeting protocols were completely different.

However, they came to terms with regard to these parameters mutually and grew the business to an extent of expanding their operations in 5 other countries in the next 2 financial years.

Example #2

The world’s largest brand in the coffee market, Starbucks entered a multi-billion market in India through one of the most historic partnerships in the country. As a result, the first of the confidence of this collaboration was over a 10% jump in the Tata Consumer share.

The 50-50 partnership between Tata and Starbucks came at an initial investment of $80 million and 50 outlets across the country in 2012. Despite the government norms supporting Starbucks to enter the Indian markets on their own, they chose to partner with Tata because of their expertise with the Indian retail market, consumer behavior, and other such vital data points.

Let us understand the different types of global strategic alliances through the discussion below.

#1 - Joint Venture

Two companies forming a strategic alliance is said to be a joint venture 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.

While most governments across the globe support foreign brands to open shop in their countries without much barrier, why many companies choose to form a strategic alliance company is both fascinating and important to understand. Let us do so through the explanation below.

• Forming a strategic alliance is 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 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 awareness by using the goodwill of any of the already established companies.

Collaborating with another company to form a global strategic alliance is not all flowers and roses when it comes to ground realities. It is important to gauge the risks involved with such collaborations before agreeing to terms. Let us understand the risks through the points 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.

Just like most other businesses, two extremely successful companies could also face a significant challenge in forming a strategic alliance company. Let us understand them tho understand the concept in detail.

• 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.

It is a matter of fact that the advantages of forming global strategic alliances not only gives two companies bigger gains but also is a step towards two countries potentially understanding each other’s culture. Let us understand the advantages through the points below.

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

Despite the significant advantages for the parties involved and the economy on the whole, it is important to consider the disadvantages of a strategic alliance company to fully understand the concept.

• 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.

This article has been a guide to what is Strategic Alliances. Here we explain its examples, types, advantages, disadvantages, reasons, and risks involved. 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