A strategic alliance is an agreement between two or more parties to pursue a set of agreed upon objectives needed while remaining independent organizations. This form of cooperation lies between Mergers & Acquisition M&A and organic growth.
Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property. The alliance is a cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance often involves technology transfer (access to knowledge and expertise), economic specialization, shared expenses and shared risk.
Various terms have been used to describe forms of strategic partnering. These include ‘international coalitions’ (Porter and Fuller, 1986), ‘strategic networks’ (Jarillo, 1988) and, most commonly, ‘strategic alliances’. Definitions are equally varied. An alliance may be seen as the ‘joining of forces and resources, for a specified or indefinite period, to achieve a common objective’.
There are seven general areas in which profit can be made from building alliances.
One typology of strategic alliances conceptualizes them as horizontal, vertical or inter-sectoral:
- Horizontal strategic alliance: Strategic alliance characterized by the collaboration between two or more firms in the same industry, e.g. the partnership between Sina Corp and Yahoo in order to offer online auction services in China;
- Vertical strategic alliances: Strategic alliance characterized by the collaboration between two or more firms along the vertical chain, e.g. Caterpillar's provision of manufacturing services to Land Rover;
- Intersectoral strategic alliances: Strategic alliance characterized by the collaboration between two or more firms neither in the same industry nor related through the vertical chain, e.g. the cooperation of Toys "R" Us with McDonald's in Japan resulting in Toys "R" Us stores with built-in McDonald's restaurants.
Another typology distinguishes between four forms of strategic alliances: joint venture, equity strategic alliance, non-equity strategic alliance, and global strategic alliances:
- Joint venture is a strategic alliance in which two or more firms create a legally independent company to share some of their resources and capabilities to develop a competitive advantage.
- Equity strategic alliance is an alliance in which two or more firms own different percentages of the company they have formed by combining some of their resources and capabilities to create a competitive advantage.
- Non-equity strategic alliance is an alliance in which two or more firms develop a contractual-relationship to share some of their unique resources and capabilities to create a competitive advantage.
- Global Strategic Alliances working partnerships between companies (often more than two) across national boundaries and increasingly across industries, sometimes formed between company and a foreign government, or among companies and governments.
The advantages of forming a strategic alliance include:
- Allowing each partner to concentrate on their competitive advantage.
- Learning from partners and developing competencies that may be more widely exploited elsewhere.
- Adequate suitability of the resources and competencies of an organization for it to survive.
- To reduce political risk while entering into a new market.
- Risk of losing control over proprietary information, especially regarding complex transactions requiring extensive coordination and intensive information sharing.
- Coordination difficulties due to informal cooperation settings and highly costly dispute resolution.
- Agency costs: As the benefit of monitoring the alliance's activities effectively is not fully captured by any firm, a free rider problem arises (the free rider problem seems to be less pronounced in settings with multiple strategic alliances due to reputational effects).
- Influence costs because of the absence of a formal hierarchy and administration within the strategic alliance.
Stages of Alliance Formation
A typical strategic alliance formation process involves these steps:
- Strategy Development: Strategy development involves studying the alliance’s feasibility, objectives and rationale, focusing on the major issues and challenges and development of resource strategies for production, technology, and people. It requires aligning alliance objectives with the overall corporate strategy.
- Partner Assessment: Partner assessment involves analyzing a potential partner’s strengths and weaknesses, creating strategies for accommodating all partners’ management styles, preparing appropriate partner selection criteria, understanding a partner’s motives for joining the alliance and addressing resource capability gaps that may exist for a partner.
- Contract Negotiation: Contract negotiations involves determining whether all parties have realistic objectives, forming high calibre negotiating teams, defining each partner’s contributions and rewards as well as protect any proprietary information, addressing termination clauses, penalties for poor performance, and highlighting the degree to which arbitration procedures are clearly stated and understood.
- Alliance Operation: Alliance operations involves addressing senior management’s commitment, finding the calibre of resources devoted to the alliance, linking of budgets and resources with strategic priorities, measuring and rewarding alliance performance, and assessing the performance and results of the alliance.
- Alliance Termination: Alliance termination involves winding down the alliance, for instance when its objectives have been met or cannot be met, or when a partner adjusts priorities or re-allocates resources elsewhere.
Features common to transactions that are natural candidates for strategic alliances are:
- High impediments to comprehensive contracting resulting in a major degree of contract incompleteness
- High complexity minimizing the auxiliary potential of the body of law for resolving issues not specified in the contract
- Both allies have to invest in relationship-specific assets resulting in potential for mutual hold-ups
- Excessive cost for one party to develop the expertise to carry the transaction itself (e.g. due to experience curve)
- Transitory or uncertain character of market opportunity making a merger or vertical integration unattractive
- Need for a local party in a country due to regulatory environment (as is often the case in China)
- Association of Strategic Alliance Professionals, Inc. Professional organization that serves those who manage strategic alliances and corporate partnerships.
- Example of Strategic Alliance program Example of strategic Alliance program with Oracle and Unisys.
- Example of coaching approach to cooperations smE-MPOWER approach for coaching the formation of strategic alliances developed within a European Union funded public project. Resulting international network of cooperation coaches as a learning community.
- David C. Mowery, Joanne E. Oxley, Brian S. Silverman, Strategic Alliances and Interfirm Knowledge Transfer (1996) Strategic Management Journal, Vol. 17, Special Issue: Knowledge and the Firm (Winter, 1996), pp. 77-91
- Rigsbee, Ed (2000). Developing Strategic Alliances, First Edition. Library of Congress Cataloging-in Publication Data. ISBN 1-56052-550-9.
- Besanko, D., Dranove, D., Shanley, M., Schaefer, S. (2013). Economics of Strategy. 6th edition, Hoboken, NJ: Wiley, p. 148.