Strategic alliances
When a firm has some sustainable competitive advantage, it can maintain a state of market superiority over the competition.
Competitive advantage is usually associated with something the firm does really well in its market. But what if the firm wants to grow and enter new markets? Or to improve its internal efficiency to be more competitive in the future?
Sometimes a firm can do this through its own efforts. But not all companies have the resources, expertise and time to implement everything from needle to thread. In these cases, so-called "strategic alliances" come to the rescue.
Strategic alliances
What is a 'strategic alliance'?
A strategic alliance is a deep partnership between two or more organisations where all parties benefit by exchanging different skills, technologies and products.
Through a strategic alliance, organisations solve common problems while remaining independent of each other.
In this sense, a strategic alliance is not a merger or acquisition in which two separate companies form one new organisation. A strategic alliance is also not a consortium or a joint venture, since then two or more parties form a separate new organisation created for a specific purpose and for a specific period of time.
In short, in strategic alliances, the partner companies work in a coordinated manner to achieve certain common goals while maintaining their complete independence from each other.
To understand what exactly strategic alliances are, it is useful to consider them in the perspective of other common forms of business relationships:
1. Suppliers. When a firm works with multiple suppliers, its relationships with them tend to be short-term.
2. Preferred suppliers. When a firm chooses to work with preferred suppliers, it tends toward longer-term relationships.
3. Alliances. When one firm partners in an alliance with another, in addition to the long-term orientation, there is now a higher degree of mutual trust. The focus continues to be on the two organizations working independently, although they exchange ideas with each other.
4. Strategic alliances. The business relationship between the organisations is becoming strategically important as all parties are interdependent on each other, which in turn creates benefits and new opportunities for them.
Or, as it can be seen, strategic alliances are something different from ordinary supplier-customer business relationships, as they require a much more long-term and strategically binding orientation than usual day-to-day transactions.
Why form strategic alliances?
There are various reasons for forming strategic alliances.
Chief among them are:
Entering new markets with new products. For example, a garment company may partner with an established local brand to produce garments under that brand for a new customer demographic - young people. The partnership is also beneficial for the company that owns the brand, as it can make more sales without a major initial investment.
Access to international markets. For example, a toothpaste manufacturer from one country partners with a toothbrush manufacturer from another country, each taking over the distribution of the other's products. Because the products combine and complement each other without competing, this benefits both parties.
Gaining access to new distribution channels. For example, a cosmetics manufacturer with its own chain of stores forms a strategic alliance with a popular online store to organise sales on the Internet. In this way, the manufacturer gains access to a new distribution channel - online sales - and the e-shop expands the assortment for its customers.
Gaining access to new technology. For example, a mobile phone manufacturer forms a strategic alliance with a developer of a useful paid photo processing application, under which each device of the manufacturer reaches the end user with the application pre-installed. By exchanging technology, both parties gain benefits - the handset manufacturer becomes more attractive in the eyes of potential customers, and the software application manufacturer generates stable revenues.
Obtaining savings from the scale. For example, a group of small agricultural producers form a strategic alliance with a transportation company to exclusively deliver their produce to certain cities, warehouses, and markets. In this way, the producers obtain economies of scale in the form of a lower cost of the transport service, and the transport firm expands its customer base.
Improving reputation. For example, a reputable auditing firm offers its services only to firms in the Top 10 of a relevant industry and forms strategic alliances with them. In this way, the audit firm enhances its reputation because it works only with top clients, and clients enhance their reputation with their other counterparties (banks, institutions, shareholders, etc.) because they use the services of the reputable audit firm.
As seen in the examples above, strategic alliances, as opposed to mergers, acquisitions and joint ventures, help to reduce risk in a controlled manner while gaining access to new markets, new products, channels, technologies or other important benefits.
Of course, like anything, strategic alliances have drawbacks. They lie mainly in the reduced flexibility for each of the two companies, as some investment of material, financial and human resources is required, while at the same time there is some dependence on the other party in the alliance.
Therefore, before forming a strategic alliance, a precise assessment of all the advantages and disadvantages must be made. In this respect, it is useful to carry out a SWOT analysis or SOAR analysis to highlight the pros and cons, opportunities and threats to a possible strategic partnership.
How to form strategic alliances?
Here is what the process of forming a strategic alliance generally looks like:
1. Determine what you want to gain strategically. What is the main strategic advantage (or advantages) that you want to attract to your side by entering into a strategic alliance.
2. Determine what organization you want to enter into a strategic alliance with. What should your strategic partner be - where should it be located geographically, how big should it be in terms of scale, with what experience and skills, what market presence, etc.?
3. Determine whether there is an initial match with the potential strategic ally. Are there similarities in your thinking? Do your products fit together? Is there initial trust?
4. Set mutual expectations together. What are your goals? How will you achieve them? How will you communicate? How will you solve common problems when they arise? How will you control the processes?
5. Identify the pros and cons of the future strategic alliance. Does it offer mutual and equal benefits? Does it give a sufficient return on investment of funds and resources? Is there real capacity in both countries to deliver on their commitments?
6. Create an exit strategy for the strategic alliance. How and under what conditions will the relationship between the parties be terminated? How will you proceed if the strategic alliance does not yield the desired benefits?
7. Sign a contract. Put everything on paper, with clear rights and obligations agreed upon for all parties involved.
In summary
A strategic alliance is an in-depth partnership between two or more organisations where all parties receive benefits by exchanging different skills, technologies and products.
The benefits to the parties may vary - access to new markets, more sales, economies of scale, etc.
Through a strategic alliance, organisations solve their common problems in creative ways while remaining independent of each other. This is one of the fastest ways to strengthen or increase competitive advantage in a particular market.