Market conditions require an entrepreneur to constantly seek opportunities to grow and build a strong competitive position. A non-obvious, yet lucrative move in this direction can be the establishment of a strategic alliance. What is it and what to pay attention to in this type of relationship? Read on to find out!
Strategic alliance – table of contents:
- Strategic alliance – what is it?
- How to establish a strategic alliance?
- Stages of creating a strategic alliance
- Types of strategic alliances
- Examples of strategic alliances in business
- Advantages and disadvantages of a strategic alliance
Strategic alliance – what is it?
A strategic alliance takes place when two or more competing companies decide to cooperate. It is cited that first, as a result of such an alliance, they strengthen their competitive position by the achievement of mutual benefits, such as access to new technological, financial, or knowledge resources, entry into new markets, cost reduction, and overall improvement in profitability. It represents a manifestation of competition.
How to establish a strategic alliance?
At the very beginning, ask if strategic partnerships are really necessary to meet your customer’s needs. Are there entities in your environment with which you could enter into this kind of partnership? If so, you can proceed with the process of creating a strategic alliance.
Stages of creating a strategic alliance
The procedure for establishing such an alliance develops through the following stages:
Figure 1: The process of creating a strategic alliance
- Developing a strategy
- Partner selection
- Determine the structure of the alliance
- Managing the alliance
- Evaluation of the alliance
Firstly, you need to define precisely what you want to achieve by allying and what kind of problems, it should resolve. The intentions of prospective partners must remain in line with each other and with their missions. It is a wrong tactic to look for a matching ally without analyzing their professed values or business goals. Starting a venture has to come from the initiative of the management and decision-makers in the company.
The search for partners should take place based on a previously developed strategy. This means that it is worth establishing certain requirements that potential partners should meet. Companies should share common values and have identical organizational cultures. Every feature they share increases the chance of success, while strategic gaps should be bridged. In addition, you can pay attention to what stage of the life cycle, the selected entity is in – organizations similar in this respect can better understand each other’s needs and challenges.
After selecting a business partner, we proceed to negotiate the terms of the contract. We include the goals (already established), the roles and resulting tasks for each member, the standards to meet (use KPIs to measure the effectiveness of activities), as well as penalties for failure to meet the arrangements and any issues regarding the protection of the interests of the entities.
This is the time to undertake activities to contribute to the achievement of the alliance’s strategic goals. It also involves resolving disputes that arise along the way, as well as cyclical inspections to verify compliance of activities with the approved agreement.
The next stage is to verify the effectiveness of the alliance. Were the set goals achieved? What was the nature of the relationship during cooperation, were there conflicts, or disagreements? These are key issues to look at and decide on the future of the alliance. Usually, if relations between the companies went well, a decision is made to continue and shape new terms for the next agreement. In other circumstances, it is possible to withdraw from the partnership.
Types of strategic alliances
We can distinguish 2 typologies, defining strategic alliances. The first consists of three types of coalitions that can be concluded. These include:
- EQUITY ALLIANCE
- ALLIANCE WITHOUT EQUITY (NON-EQUITY)
This is an agreement in which two or more companies enter into the establishment of a joint new business. Issues of access to financial resources, material resources, expenditures, decision-making, and any other issues regarding the organization of work are included in a binding agreement.
This applies to situations where shareholders have a certain number of shares in the capital of the other company (and vice versa).
Non-equity coalitions are less formal. They mostly involve, for example, the conclusion of licensing agreements in the research and development, production, or marketing areas, which require the sharing of know-how, knowledge, and experience of the company. Unlike the types highlighted above, they do not result in the creation of a new entity, nor is there a need to share capital. Despite the somewhat limited obligations in this alliance, issues related to member liability, intellectual property rights, payment terms, etc. still require separate handling.
In addition to the above division, you can find another classification of strategic alliances:
- Pre-competitive alliance – occurs among companies from separate economic sectors, they enter into cooperation to jointly develop new technology, research in the field, etc..;
- Pro-competitive alliance – partners do not pool their capital resources, their relationship is usually focused on the distribution of raw materials, products, etc.;
- Non-competitive alliance – refers to companies operating in one industry, however, without competing with each other, they are, for example, companies operating in separate geographic areas;
- Competitive alliance – cooperation on such terms is often subject to conflicts and involves companies in the same industry that operate in different countries. They form to expand into new markets.
Examples of strategic alliances in business
This is an example of a strategic alliance that failed. Danone (a French-origin company) is mainly engaged in making dairy products. Wanting to expand its geographic reach and meet the challenges of globalization, it decided to ally with Wahaha. This is a Chinese-origin company that sells bottled beverages.
In 1996, the companies decided to form a joint venture. However, in 2005, Danone discovered that the Asian company was manufacturing and selling identical products (using its distribution network and marketing facilities), which made it $100 million. This was a violation of the terms agreed upon in the agreement, resulting in a court battle. Looking for reasons for this difficult situation, dishonesty on the part of Wahaha’s CEO was pointed to, but also negligence on the part of Danone, which could have inspected the operation of the company’s Chinese branch much earlier.
In contrast, the Starbucks enterprise boasts many examples of competition that have significantly influenced its success. These include partnerships with Barnes & Noble, PepsiCo, United Airlines, and Target.
Barnes & Noble began offering Starbucks services (buying and consuming coffee) in its stationary bookstores while shopping. This was a good step, which helped it increase its customer base and sales performance.
Another good move was becoming a partner of PepsiCo, which enabled the sale and distribution of one of Starbucks’ best-known products, the Frappuccino. An alliance with United Airlines allowed the coffee chain’s products to be offered to passengers during the flight.
What’s more, a good example of strategic alliance practice was with Target. It involved placing Starbucks locations in the market to attract customers who wanted to pass the time while shopping with a cup of coffee.
Advantages and disadvantages of a strategic alliance
The scope of strategic alliances includes a range of opportunities for trade cooperation. It seems that the presence of such agreements is even becoming a necessity in the face of intense economic development and unrelenting competition. This is because they make it possible to enter and conquer new markets, acquire valuable resources (information, financial assets, etc.), expand the customer base, and build a positive image of one’s brand.
Nevertheless, it is also worth remembering the disadvantages and dangers of establishing this type of relationship. Finding the ideal partner who will accept certain compromises and work for a jointly professed idea can become very time-consuming. However, this is one of the factors determining the success of the venture. As in the aforementioned case of Danone, the wrong ally may resort to unfair practices for which we could have to take responsibility. It is worth approaching this process with due caution, after carefully defining our needs as a company and analyzing the profiles of potential strategic partners.
Read also: What is a business risk?