Assignment on Strategic Alliance

Date: 14/09/2020

What do you mean by strategic Alliance?

Strategic alliances are arrangements between at least two autonomous

organizations to collaborate in the assembling, advancement, or offer of items and
administrations, or different business destinations.

For instance, in a Strategic alliances , Company A and Company B join their

particular assets, capacities, and center capabilities to create shared interests in
planning, producing, or circulating products or administrations.

Types of Strategic Alliances

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

Joint Venture

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 own
30%, the joint venture is classified as a Majority-owned Venture.

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, equity strategic alliance would be formed.

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 reasons 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 reasons for
strategic alliances are different:

 Slow Cycle

In a slow cycle, a 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 establish a franchise in a new
market.

 Standard Cycle

In a standard cycle, the company launches a new product every few years and may
or may not be able to maintain its 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,
or gain access to complementary resources.

 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.

Disadvantages
There are also some trade-offs to consider:

1. Weaker management involvement or less equity stake

2. Fear of market insulation due to the local partner's presence

3. Less efficient communication

4. Poor resource allocation

5. Difficult to keep objectives on target over time

6. Loss of control over important issues such as product quality, operating

costs, employees, etc.

Submitted by Surbhi Thakkar (0191MIB036)