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A strategic alliance is an arrangement between two companies to undertake a mutually beneficial project while each retains its independence. A company may enter into a strategic alliance to expand into a new market, enlarge its product line, or develop an edge over competitors. In some cases, strategic alliances can involve more than two companies.
At the heart of strategic alliances lies companies that are striving to grow but may not have the resources to embark on certain initiatives. Instead of going it alone, they can look for other companies with the needed resources or expertise to partner with.
Consider the massive client base of Uber. While Uber had an interest in making the ridership experience as pleasant as possible, single-handedly building out its own repository of music that riders could enjoy on demand would have been a costly challenge. So Uber turned to Spotify to enter into a strategic alliance.
Spotify, for its part, could boast of a well-developed technological product that was ready for a wider consumer audience (exactly what Uber had to offer). By forming a strategic alliance in which Uber provided the consumers and Spotify the technology, the two companies came together to create a market opportunity that neither could have achieved on its own.
Though less formal than some other types of business arrangements, a strategic alliance typically involves contracts that spell out the obligations of each alliance member.
Strategic alliances can come in many sizes and forms. Some generic examples:
There are three primary forms of strategic alliances:
A joint venture occurs when two companies come together to create an entirely new, separate company that each of the existing companies becomes a parent to.
For example, in 2012, Microsoft and General Electric Healthcare signed a joint agreement to create a new, third company called Caradigm, with each of them owning 50%. Caradigm's mission was to develop and market an open healthcare intelligence platform. The idea behind the joint venture was that Microsoft had the technical capability of making such a platform work, while GE's healthcare IT division had the expertise on the healthcare side.
In 2016, GE Healthcare bought out Microsoft's share in the company. Then, in 2018, it sold the entirety of Caradigm to Inspirata.
An equity strategic alliance may have similar outcome goals as a joint venture. However, it is funded differently in that one company makes an equity investment into another.
For example, in 2010, Panasonic invested $30 million in the automaker Tesla by purchasing shares of Tesla common stock in a private placement. The investment was intended to build a stronger alliance between the two companies and to help expand Panasonic's footprint in the electric vehicle market. As one of the world's leading battery cell manufacturers, Panasonic's skill set blended strongly with Tesla's ambition to improve its battery packs and reduce its costs.
The relationship between the two companies continues to this day.
In a non-equity strategic alliance, two entities come together without an exchange of equity. Each company simply brings its resources to the alliance for the mutual benefit of both. The relationship between Barnes & Noble and Starbucks is one highly visible example. Starbucks brews the coffee. Barnes & Noble stocks the books. Both companies do what they do best while sharing the costs of retail space to the their mutual benefit.
There are many reasons that a company might choose to enter into a strategic alliance. They include:
Strategic alliances often form between companies with varying business or product cycles. For example, companies with short cycles may seek companies that have made long-term investments to aid in the rapid development of a product that would otherwise require more time.
Forming a strategic alliance requires creativity, forward thinking, and savvy business sense. Though strategic alliances can differ in many respects, most involve some common steps:
As with any major business decision, strategic alliances have potential upsides and downsides that are worth thinking through.
A strategic alliance can allow a company to take advantage of new opportunities it would otherwise miss out on. This could include adding new clients, branching out into in new markets, or creating and selling new products. Each of these avenues has the potential to increase a company's revenue and profitability.
Strategic alliances are also a way to diversify a company's revenue stream and mitigate company-wide financial risk. Alliances can also mitigate risk because companies with expertise in different areas give each other access to the resources to solve unique challenges or navigate unfamiliar business scenarios.
Finally, strategic alliances can benefit a company's image if it partners with another well-respected company, especially one that has an established presence in different markets.
A strategic alliance is most likely to succeed if there is strong communication between the partners. This means both parties must continually expend resources to manage the alliance and ensure that both sides are in sync and in agreement. In addition, if there are major disagreements between the alliance members, they may waste resources on resolving conflicts that would not have occurred had there been no alliance.
Though both parties should gain from a strategic alliance, one company will often benefit more than the other, and there may not be a simple solution to balance that out. There may also develop an unnatural reliance on one side or the other in terms of resources or expertise.
Just as a strategic alliance can sometimes burnish a company's public image, the opposite can also happen. One company's misdeeds can harm the other's reputation, even though it may have had nothing to do with them.
Strategic alliances are important because they enable a company to benefit by leveraging the assets of another company.
An alliance is a collaboration between two companies in which each company is expected to profit or benefit from the agreement. A partnership is a more formal type of agreement in which partners combine to create a single, shared economic interest.
In an alliance, two companies agree to cooperate on a particular project. In an acquisition one company simply buys the other.
A strategic alliance creates a relationship between two entities. For this reason, the most important factor in the success or failure of an alliance is maintaining the trust and effective collaboration between their teams. The alliance must be guided by clear objectives to make sure both sides stay on the same page.
A strategic alliance is an agreement between two parties for the mutual benefit of both. While there are many examples of successful strategic alliances, companies also have to be careful to choose the right partners and make sure that the alliance's goals are clear and well-understood from the outset.
