Strategic Alliances

Partnering for Mutual Benefit

Strategic Alliances - Partnering for Mutual Benefit

© Veer
Irina Tischenko

Being a cog in a larger machine can allow your organization to do amazing things.

A company is usually successful because it does a small number of things really well.

Sometimes, however, those things can only take them so far, and to grow further, they must develop new capabilities.

If you operate successfully in one market, and you want to enter a new market quickly, how do you do that? Or, what if your sales suddenly increase, and you need a way to manufacture your product faster and more efficiently?

You could try to develop an in-house solution. But do you have the time, expertise, or infrastructure to support it? And if you want to stay focused on your core competences, which are critical for long-term success, you may not want to take time, resources and attention away from this.

Often the best way to find a solution is through strategic alliances.

Strategic alliances link the key capabilities of two or more organizations. The result is that all parties benefit from the partnership by trading things like skills, technologies, and products. Essentially, these alliances are partnerships that companies use to solve a mutual problem, while they remain independent.

A strategic alliance is not the same as a merger, takeover, or acquisition, which move two previous independent companies into one corporate structure. In an alliance, the partners share managerial control and work together to achieve mutual goals, while remaining independent organizations.

A joint venture is also different from a strategic alliance. In a joint venture, the parties set up a separate company and agree to perform a specific task for a specific period of time, while they still independently run their separate businesses.

Why Form a Strategic Alliance?

Rather than grow from within, form a joint venture, or enter into a merger, alliances are often easier and less risky alternatives to achieve your goals.

Here are some of the reasons that your organization might gain from these alliances:

  • To enter new markets with new products and services – A well-established clothing manufacturer needs to extend its product range as consumer preference changes. It forms a strategic alliance with a new, contemporary brand, so it gains access to their younger demographic, and they significantly increases production and sales. In return, the partnership helps the new brand scale up quickly.
  • To access international markets – Two manufacturers of different types of car part in different countries agree to act as distributors for one-another's parts. Each can now reach more customers, and the central distribution ensures that orders comply with each country's safety requirements.
  • To access new distribution channels – A high-end jewelry designer, with five retail outlets, sets up a strategic alliance with an online retailer known for its reliability and security. Both companies increase sales as a result: the designer by reaching a wider audience, and the online retailer by offering a wider range of attractive online products.
  • To access new technology – A computer manufacturer and a computer game development company form an alliance in which every computer is shipped with a full version of one of the gaming company's top-selling games. This is a selling feature for the computer manufacturer, it guarantees income for the gaming company, and it creates advertising "buzz" as consumers anticipate which game their computer will have.
  • To benefit from economies of scale (higher volume/lower cost) – A group of dairy farmers in a region get together to negotiate with a transport company to reduce transport costs.
  • To reduce the cost and risk of new strategy or product – A pharmaceutical company forms an alliance with a biotechnology company to provide resources, and distribute new products once they're ready for market.
  • To improve credibility – You developed an innovative machine that reduces manufacturing waste, and you issue an exclusive license to the top 20 manufacturers in your industry for the next two years. These manufacturers benefit from the new technology and reduce costs, you have guaranteed income, and you build a large potential market at the end of the two years.

As you can see from these examples, creating a strategic alliance doesn't mean that you have to increase your own size. And it helps reduce risk while you assess the potential of new markets, products, or channels.

There also are disadvantages – you give up a portion both of control and reward, reduce the flexibility of all parties, invest significant time and resources in the alliance, and risk depending too much on your partner. Clearly, therefore, alliances need to be evaluated carefully before you commit to them.

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How Are Strategic Alliances Formed?

The big question that many people have about strategic alliances is how they're different from simply using a supplier on a transaction-by-transaction basis. To find the answer, look at the stages in growing a transactional relationship to become more strategic and beneficial:

  • Vendors – You have short-term, contract-driven relationships with a variety of suppliers.
  • Preferred suppliers – You move toward longer-term relationships, and you begin to form trust. You may have joint operations that focus on quality, and you may be able to influence the development of suppliers' new products.
  • Alliance – You both have a mutual advantage in these relationships as well as high levels of trust. The focus, however, remains on adding value independently, while you work cooperatively and exchange ideas.
  • Strategic alliance – The business relationship becomes strategic when there's a level of mutual dependency, and when the alliance itself is what creates increased capabilities and opportunities.

To form an effective strategic alliance, you need a high level of commitment and planning. Here are the basic considerations:

  • Determine the specific strategic advantage – What do you want to achieve?
  • Decide what type of company you want to work with – What attributes are you looking for in terms of location, size, market, capabilities, technology, and so forth?
  • Examine your compatibility:
    • Are your cultures compatible?
    • Is there top management buy-in?
    • Are your brands compatible?
    • Do you compete in the same or similar markets?
    • Do you trust these people?
  • Define expectations together:
    • What is the mission and vision for the strategic alliance?
    • What are the goals and objectives?
    • What resources and capabilities will each party provide?
    • How will you communicate?
    • How will you implement the activities?
    • How will you manage the plan?
    • How will you monitor and evaluate progress?
    • How long will the relationship last?
  • Evaluate the proposed alliance:
    • What risks are associated with the alliance?
    • Does the proposed alliance offer a high enough Return on Investment for both parties to commit significant effort to the alliance?
    • Do both parties have the capacity to carry out the work envisaged?
  • Create a contract – Include the following:
    • Operational information and expectations.
    • Confidentiality agreement.
    • Intellectual property rights.
  • Develop an exit strategy – What relationship will you have after the strategic alliance ends? How will you achieve this? And what will you do if the alliance doesn't work out?

Key Points

Strategic alliances often allow a company to increase its scale, scope, and/or capacity with reduced risk and great potential benefit.

Whether you want to speed up your entry into a new market, increase the range of products you sell, reduce costs, increase sales, or otherwise improve your competitive position, a strategic alliance is often the fastest and most economical way to achieve this.

By setting up a mutually beneficial relationship, and still keeping your company's independence, you can often create a win-win situation that can be managed with great success. You need to plan thoroughly and choose your alliance partners well. However, if you follow a clear plan and fully document how you'll manage the process, you can create a strategic alliance that fits your business profile and helps you achieve your growth goals.