Strategic alliance (strategic partnership)

In business, a strategic alliance (or strategic partnership) is an arrangement between two or more independent organizations to work together in pursuit of mutually beneficial objectives. The partners contribute resources, capital, and capabilities to form a competitive advantage. The companies also share control, management, and risk.

The agreement does not establish ownership between the companies involved. Each organization maintains its autonomy.

Strategic alliances can be categorized into three types: vertical, horizontal, and diagonal. The progression of a strategic partnership involves seven stages: strategy formulation, partner selection, negotiation, design, management, evaluation, and termination.

Strategic alliances offer advantages and disadvantages. The partnership enables companies to access previously unavailable resources, pursue new opportunities with more speed, and reduce risk. However, management differences may lead to coordination problems, an imbalance of power, and distrust over information sharing.

Background

In a strategic alliance, two or more companies cooperate with the goal of achieving common objectives and goals. The partnership allows companies to diversify their interests, enter new markets, develop new processes, and access technology.

In order for the parties to be willing to share their resources, the partnership must benefit all involved. The responsibilities of each partner should be outlined in the agreement.

Strategic partnerships can be informal or formal, collaborative or contractual. They can be long-term or short-term arrangements. The length of time is determined by the partners' individual and shared objectives.

The agreement is an alternative to acquisitions and mergers, offering more flexibility than either arrangement. Strategic alliances do not involve the merging of assets. The partnership allows each company to operate separately.

Strategic alliances include, but are not limited to, joint ventures, research and development partnerships, and public-private partnerships.

A joint venture is an agreement between two or more companies to combine resources for a specific business project or activity. In research and development partnerships, organizations can decrease investment costs by accessing each other's innovations. Public-private partnerships are alliances between public entities and private corporations.

There are three types of strategic alliances. A horizontal alliance is a collaboration between two companies in the same industry and along the same stage of the value chain, the process that a company follows to make a finished product. Examples include partnerships in research and development as well as sales and marketing. US pharmaceutical company Eli Lilly and Japanese drug maker Takeda formed joint ventures between 1998 and 2006 to develop and distribute diabetes medications.

A vertical alliance occurs when two organizations on different levels of the value chain share resources, such as a company and its suppliers. In 2010, Swedish vehicle manufacturer Saab and German automaker BMW formed an alliance in which BMW provided automotive components and technology to Saab. Through cooperation, automakers share the cost of manufacturing parts.

A diagonal alliance is a partnership between two companies from different industries. The coffee company and café chain Starbucks has been particularly successful in making diagonal alliances to enter new markets. Since 1993, Starbucks has partnered with Barnes & Noble bookstores to service coffee shops inside the retailer's locations. Starbucks also formed an alliance with soft drink manufacturer PepsiCo to sell the Frappuccino, a popular bottled coffee drink sold in grocery and convenience stores.

Overview

Organizations must take several factors into consideration when forming strategic alliances. This includes establishing goals and objectives, vetting partners, and devising a clear plan of action.

A strategic partnership advances along the following seven stages, from its creation to its potential demise:

• First stage: Strategy formulation. The company must decide what kind of business venture—a merger or acquisition, individual growth, or alliance—provides the best path to attaining its goals. If the company decides on a partnership, it should then form a strategy on how to meet its objectives.
• Second stage: Partner selection. Companies should determine what they need from an alliance, such as technology, capabilities, and capital, and look for a partner who can provide these resources. Companies will narrow down the list of prospective partners through a selection process.
• Third stage: Negotiation. During the process of deal making, organizations must determine if their strategies and goals will align over the period of the agreement. Negotiators must designate each party's contributions, roles, and responsibilities. They must define daily operating processes and related details.
• Fourth stage: Design. Companies decide upon the conditions that govern the alliance, such as contract provisions and management control. Organizations determine what information is appropriate to share, from company culture to intellectual property.
• Fifth stage: Management. This concerns the coordination and execution of day-to-day operating procedures as the alliance takes effect. Companies must focus on monitoring processes and building relationships as they learn to communicate and work together.
• Sixth stage: Evaluation. Organizations develop and implement an appraisal system to determine if the partnership is meeting alliance objectives. Evaluations may be based on individual or joint assessments. They can be used to discern if the partnership's design or management framework should be altered, or if a company should leave the alliance.
• Seventh stage: Termination. Some alliances may last for a set amount of time. This stage allows for the design of a termination plan, which addresses the division of resources and the minimization of losses.

Strategic alliances provide many benefits as companies look for ways to grow their share of the market or expand into a new one. Organizations gain access to resources and capabilities, including new technology. Companies can use this information to develop efficient processes and product innovations.

By relying on information from their partners, companies aspiring to create new products or enter new markets can do so at a faster rate, cutting down on their learning curve. Alliances also allow companies to share the burden of risk and the costs of investments.

Strategic partnerships also come with disadvantages. Disagreements among management can disrupt the coordination of operating procedures and responsibilities. As the companies become tied to one another, they may lose their organizational flexibility. One partner may become dependent on the other, leading to a power imbalance.

The companies involved may be unable to pursue other opportunities or alliances that could be more valuable. Partners may also be leery to share information if one of them is a competitor, or could become one in the future.

Strategic alliances are a critical tool for companies to build and sustain a competitive edge. By allowing organizations to share resources and risk, they offer a cost-effective option to help companies achieve their goals.

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