Table of Contents
What is Strategic Alliance (Definition):
Strategic Alliance (SA) is an agreement between two entities to pool their resources for achieving a common business goal. They are generally entered when each entity to the agreement possess some kind of an expertise. This expertise, when combined makes them complete and provides a distinct competitive advantage to both the entities. Unlike Joint Venture, SA doesn’t necessitate the creation of the new entity. As a result, the entities involved in SA can continue to operate as an independent entity.
Generally, a strategic alliance is entered into to gain geographical presence, achieve economies of scale through alliance for manufacturing or to gain access to research/technology etc.
Types of Strategic Alliances:
Horizontal Strategic Alliance
It is an alliance between companies operating in the same business area. In other words, companies which were competitors previously now join hands to enhance their competitiveness against other competitors in the market. The classic example of this kind of SA is Renault – Nissan Alliance. The SA between both the entities is neither by a merger of nor by an acquisition, however, it is through a cross holding agreement. This kind of SA provided both the companies with competitive advantages like economies of scale as the raw material cost can be negotiated for larger volumes, logistics cost can be rationalized, research & development cost can be rationalized and even marketing and servicing network can be commonly utilized.
Vertical Strategic Alliance
This kind of alliance is largely seen between upstream and downstream value chain of firms product. For E.g. Ink manufacturers entering into a strategic alliance with Pigment manufacturers, this kind of arrangement ensures ink manufacturers with a consistent supply of requisite kind of Pigment. Further, a car manufacturer entering new geography may enter into an SA with distributors which enable it to expand rapidly.
Various Ways of entering into a Strategic Alliance:
- Joint Venture: Joint Venture is an alliance entered by two or more entities to pool up their resources in the new entity to achieve the tangible business objective.
- Equity Participation: This is an alliance where one entity acquires a substantial equity stake in other entity so it has control to drive business decisions. (Renault – Nissan Alliance; explained earlier)
- Non – Equity: Entities involved SA agree to share their core competencies (expert knowledge) in order to create competitive advantage. Since no new entity is created, equity participation is not required.
Reasons for Strategic Alliance / Logic behind Strategic Alliance
- Gaining an access to a restricted market (China)
- Gaining a foothold in new marker
- Increase the speed of development of new products
- Maintain leadership position
- Leverage upon the befits like economies of scale, lower cost
- De-risking the R&D efforts
- Gain market power (especially pricing power)
- Gain access to know-how
- Pool resources to fund large capital intensive projects
- Gaining competitive advantage against competitors
In the nutshell, Strategic Alliances helps both the entities in agreement to gain/leverage from the expertise possessed by another one. Since it does not necessitate the creation of a new entity, both the entities can continue to undertake their core activity independent of SA. Entering right kind of SA reduces the costs and in a way enhances the shareholders’ value.