What Is a Strategic Alliance?

A strategic alliance is an arrangement between two companies to undertake a mutually beneficial project wh♐ile 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.

Understanding Strategic Alliances

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 companieꦐs 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 marketꦇ opportunity that neither could have achieved on its own.

Examples of Strategic Alliances

Strat🌌egic alliances can come in many sizes and forms. Some generic exam𒆙ples:

• An oil and natural gas company might form a strategic alliance with a research laboratory to develop more commercially viable recovery processes.
• A clothing retailer might form a strategic alliance with a single manufacturer to ensure consistent quality and sizing.
• A website could form a strategic alliance with an analytics company to improve its marketing efforts.

Types of Strategic Alliances

There ar𝕴e three primary forms of strategic alliances:

Joint Ventures

A joint venture occur꧟s when two companies come together to create an entirely new, separate company that each of the existing compღanies 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.

Equity Strategic Alliances

An equity strategic alliance may have similar outcome goals as a joint venture. However, it is fuﷺnded differently in that one ܫcompany 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 澳洲幸运5开奖号码历史查询: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 t🎐o improve its battery packs and reduce its costs.

The relationship between the two companies continues to this day.

Non-Equity Strategic Alliances

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.

How Strategic Alliances Can Create Value

There are many reasons that a company mighꦏt choose to enter into a strategic alliance. They include:

• Improving short-term finances. Companies wanting to see immediate financial impacts may find it easiest to leverage another company's resources to improve their short-term position in the market.
• Eliminating barriers to entry. Companies may not have the capital on hand to enter certain markets. Instead, they can partner with companies that have already made those investments to gain access cheaper and faster.
• Gaining better business insights. Companies may have no idea how a certain 澳洲幸运5开奖号码历史查询:business model will perform. Instead of having to build out an entire model and self-fund an experiment, companies can leverage strategic alliances to "test run" how certain situations may go and use that information for future decision making.
• Sharing financial risk. Should a business venture fail, both parties in a strategic alliance are likely to share the financial responsibility. Instead of single-handedly bearing the brunt for the failure, each party may receive assistance from the other as part of the alliance agreement.
• Innovating beyond current capabilities. In the Panasonic/Tesla alliance mentioned above, their partnership put some of the smartest experts in electric vehicles and batteries on the same team, enhancing the innovative capacity of both organizations.

How to Form a Strategic Alliance

Forming a strategic alliance requir♈es creativity, forward thinking, and savvy business sense. Though strategic alliances can differ in many respects, most involve some common steps:

• Brainstorm potential partners. Often, strategic alliances unite companies in different industries. Consider other companies that may have a need for your services or have a weakness where your company has a strength. Conversely, consider the weaknesses of your own company and what types of entities could bring you the resources to help bridge the gap.
• Outline alliance proposals. Strategic alliances must make sense for both parties. A company that wants to initiate one needs to a propose a plan whose financial and strategic benefits to the other company are clear.
• Mutually determine goals. Both sides of a strategic alliance should have the opportunity to provide input on what the revenue and profit targets and operational strategy will be.
• Finalize the plan. Once both parties are on board, the strategic alliance can be formalized with the necessary legal documents, spelling out what is expected of each of them and what happens if one or the other fails to live up to its side of the bargain. This plan also acts as the roadmap for decision making in the future as the newly formed alliance moved forward.

ꦫAdvantages and 🌳Disadvantages of Strategic Alliances

As with any major business decision, strategic alliances hav🐓e potential upsides and downsides that are 🌺worth thinking through.

Pros of a Strategic Alliance

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 澳洲幸运5开奖号码历史查询:revenue stream and mitigate company-wide financial risk. Alliances can also mitigate risk because companies with ex🌌pertise 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.

Cons of a Strategic Alliance

A strategic alliance is most likely to succeed if there is strong communication between the partners. This means bꦦoth 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 of🅠ten 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.

The Bottom Line

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.