What are Strategic Alliances?

Strategic alliances are agreements between two or more independent companies to cooperate
in the manufacturing, development, or sale of products and services or other business
objectives.

For example, in a strategic alliance, Company A and Company B combine their respective
resources, capabilities, and core competencies to generate mutual interests in designing,
manufacturing, or distributing goods or services.

Types of Strategic Alliances

There are three types of strategic alliances: Joint Venture, Equity Strategic Alliance, and
Non-equity Strategic Alliance.

1. A joint venture is established when the parent companies establish a new child company.
For example, Company A and Company B (parent companies) can form a joint venture by
creating Company C (Child Company).

In addition, if Company A and Company B each own 50% of the child company, it is defined
as a 50-50 Joint Venture. If Company A owns 70% and Company B owns 30%, the joint
venture is classified as a Majority-owned Venture

2. Equity Strategic Alliance

An equity strategic alliance is created when one company purchases a certain equity
percentage of the other company. If Company A purchases 40% of the equity in Company B,
an equity strategic alliance would be formed.

3. Non-equity Strategic Alliance

A non-equity strategic alliance is created when two or more companies sign a contractual
relationship to pool their resources and capabilities together.

Reasons for Strategic Alliances

To understand the reasoning for strategic alliances, let us consider three different product life
cycles: Slow cycle, Standard cycle, and Fast cycle. The product life cycle is determined by
the need to innovate and continually create new products in an industry. For example, the
pharmaceutical industry operates a slow product lifecycle, while the software industry
operates in a fast product lifecycle. For companies whose product falls in a different product
lifecycle, the reasoning for strategic alliances are different:

#1 Slow Cycle
In a slow cycle, the company’s competitive advantages are shielded for relatively long
periods of time. The pharmaceutical industry operates in a slow product life cycle as the
products are not developed yearly and patents last a long time.
Strategic alliances are formed to gain access to a restricted market, maintain market stability
(setting product standards), and establishing a franchise in a new market.

#2 Standard Cycle
In a standard cycle, the company launches a new product every few years and may or may
not be able to maintain their leading position in an industry.

Strategic alliances are formed to gain market share, try to push out other companies, pool
resources for large capital projects, establish economies of scale, and gain access to
complementary resources.

#3 Fast Cycle
In a fast cycle, the company’s competitive advantages are not protected and companies
operating in a fast product lifecycle need to constantly develop new products/services to
survive.

Strategic alliances are formed to speed up the development of new goods or services, share
R&D expenses, streamline market penetration, and overcome uncertainty.

Value Creation in Strategic Alliances

Value Creation-The performance of actions that increase the worth of goods, services or
even a business. Many business operators now focus on value creation both in the context of
creating better value for customers purchasing its products and services, as well as for
shareholders in the business who want to see their stake appreciate in value.
Strategic alliances create value by:

1. Improving current operations

2. Changing the competitive environment
3. Ease of entry and exit

1. Current operations are improved due to:

 Economies of scale from successful strategic alliances

 The ability to learn from the other partner(s)
 Risk and cost being shared between partner(s)

2. Changing the competitive environment through:

  Creating technology standards (for example, Sony and Panasonic announced to work
together to produce a new-generation TV). This would help set a new standard in a
competitive environment.
 Creating tacit collusion.

3.Easing entry and exit of companies through:

 A low-cost entry into new industries (a company can form a strategic partnership to
easily enter into a new industry).
 A low-cost exit from industries (A new entrant can form a strategic alliance with a
company already in the industry and slowly take over that company, allowing the
company that is already in the industry to exit).

Challenges in a Strategic Alliance

Although strategic alliances create value, there are many challenges to consider:

 Partners may misrepresent what they bring to the table (lie about competencies that
they do not have).
 Partners may fail to commit resources and capabilities to the other partners.
 One partner may commit heavily to the alliance while the other partner does not.
 Partners may fail to use their complementary resources effectively.