Strategic Alliances Types, Advantages and Disadvantages

Table of Contents:-

    1. Strategic Alliances Meaning
    2. What are Strategic Alliances?
    3. Types of Strategic Alliances
    4. Advantages of Strategic Alliances
    5. Disadvantages of Strategic Alliances

Strategic Alliances Meaning

To gain access to new markets and technologies while achieving economies of scale, international marketers have several organizational forms to choose from-licensing, partially-owned or wholly-owned subsidiaries, joint ventures and acquisitions. A strategic alliance is a relatively new organisational form of market entry and competitive cooperation. This form of corporate cooperation has been receiving a great deal of attention as large multinational companies still find it necessary to look for strategic partners to penetrate a market.

There is no thorough and precise definition of strategic alliance. Forming a strategic alliance is a multi-faceted process with many ways to build an alliance. An alliance may be in the areas of distribution, production, marketing, and research and development. The deal between Starbucks and Barnes and Noble is a good example of strategic alliances.

What are Strategic Alliances?

Strategic alliances can be the result of a variety of business arrangements including acquisitions, joint ventures, mergers and licensing agreements. Joint ventures are a type of strategic alliance, but all strategic alliances are not joint ventures. Unlike joint ventures which require two or more partner companies to create a separate entity, a strategic alliance does not necessarily require a new separate legal entity.

Therefore, it may not require partner companies to make arrangements to share equity. A strategic alliance is a contractual arrangement between two or more partners who agree to cooperate and use each other’s resources and expertise to successfully enter a specific market. A strategic alliance involves an exchange of ownership shares. It is a collaborative effort that allows partners to leverage their strengths and achieve common goals.

Companies enter into alliance relationships for many reasons. Individuals in emerging Latin American economies share similar motivations with their counterparts in many other countries. Typically, companies seek competitive exchange, resource acquisition and risk/cost reduction through partnerships with foreign entities. Typically, companies seek competitive exchange, resource acquisition and risk/cost reduction through partnerships with foreign entities.

These alliances enable businesses to expand their resource base, enhance their market position and reduce potential risks and costs. While companies have paid attention to the rigid side of alliance management (e.g., financial issues and other operational issues), the soft side also needs attention. The soft side of strategic alliances relates to the management of relationship capital in strategic alliances. Relationship capital pertains to the socio-psychological aspects of the partnership, with commitment and mutual trust being two key areas of focus.

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Types of Strategic Alliances

1) Based on Directions of Alliances

Like M&As collaborative ventures can be categorised as vertical backwards (or upstream), vertical forward (or downstream), horizontal or diversified. The company should always retain control of its core strategic assets and activities while outsourcing other non-core activities to partners. The following are the types of strategic alliances:

i) Diversification Alliances

Alliances between businesses in unrelated areas are often employed by one or more of the businesses to enter a new competitive arena. This type of alliance is viewed as important from a portfolio perspective as the key advantage of diversification is to broaden product and market portfolio to reduce the risk of trauma in any sector.

ii) Vertical Networks and Alliances

These can be upstream in the supply chain toward suppliers or downstream toward customers and distributors. These alliances provide a plethora of potential benefits, including the following:

a) The ability for each collaborating business to concentrate on its core competence, while at the same time benefiting the core competencies of the other businesses in the alliance, creating synergy.

b) Better accountability can be greatly enhanced if management techniques are used at the appropriate time.

c) Creating new barriers to entry.

d) Production of logistical economies of scale.

e) A government may be less willing to move against a shared operation for fear of encountering opposition from more than one company, especially if they are from different countries and can elicit support from their home governments. Generation of high-quality information regarding activities at all stages of the supply chain; and

f) Tying in suppliers, distributors, and customers to the business.

2) Based on the Extent and Timescale of Collaboration

Several other methods can be used to distinguish alliances, which are as follows:

i) Extent of Cooperation-Focused and Complex Alliances

It is possible to distinguish alliances by where they are positioned concerning the number of areas in which the parties cooperate. Some alliances are set up between businesses to collaborate in only one area of activity, such as joint purchasing, shared research, or shared distribution. A continuum exists between the two extremes of completely focused (collaboration in one activity only) and complex (collaboration in all activities parties act in concert to the point where they appear to be one single organisation) alliances.

ii) Timescales of the Collaboration

Another way in which alliances can be subdivided is by asking how long they are intended to last. Some are set up for a specific project only and are referred to as joint time-limited arrangements for the collective accomplishment of a shared aim or project. Others can last for many years and are intended to enable both or all parties to intensify the strength of their strategic position on an ongoing basis.

iii) Consortiums

One particular type of short to medium-term alliance is the consortium. Consortiums are often set up for time-limited projects, such as civil engineering or construction developments The channel tunnel was constructed by several construction companies in a consortium that was called Trans Manche Link (TML). TML was dissolved on the successful completion of the project. Another example of a consortium is Camelot, the first U.K. National Lottery operator.

Advantages of Strategic Alliances

The advantages of the strategic alliance are given as follows:

Advantages of Strategic Alliances

1) Spread and Reduce Costs

To engage in international production or sales, a company has to incur certain costs. However, with small volumes of business, contracting the task out to a specialist rather than handling it internally may prove to be cheaper and more effective.

2) Specialise in Competencies

The resource-based view of the company holds that each company has a special combination of competencies. A company may seek to improve its performance by focusing on activities that are appropriate to its core competencies. In addition, the company may choose to outsource those services, products or support activities for which it is less qualified.

3) Avoid or Counter Competition

Sometimes markets are not large enough to accommodate many competitors. As a result, companies can then collaborate so that they do not have to compete with each other.

4) Secure Vertical and Horizontal Links

There is a promising opportunity for cost savings and supply chain stability from vertical integration. However, some companies may lack the necessary expertise or resources to effectively own and manage the entire value chain of activities. Horizontal links may provide finished products. For finished products, it is possible to achieve economies of scope in distribution.

5) Gain Location-Specific Assets

The existence of political, cultural, competitive and economic differences between countries creates challenges and formidable barriers for companies that wish to expand their operations overseas. When companies feel ill-equipped to handle these differences due to a lack of resources, then they may opt to collaborate with local businesses to better manage their operations in a particular area.

6) Overcome Governmental Constraints

Many countries limit or impose restrictions on foreign ownership. For example, the United States limits foreign ownership in airlines that service the domestic market and in sensitive defence manufacturers, while Mexico limits ownership in the oil industry. India and China have particularly stringent regulations that often force foreign companies to either share ownership or make significant concessions to align with their sovereignty and economic objectives. As a result, companies may have to cooperate if they are to serve some foreign markets.

7) Minimise Exposure to Risky Environments

Companies worry that political environment or economic changes will affect the safety of assets and their earnings in their foreign operations. One way to minimise loss from foreign political occurrences is to minimise the base of assets located abroad or to share them. A government may hesitate to act against a joint operation for fear of facing opposition from multiple companies. Especially if the companies are from different countries across the world then it could potentially seek support from their home governments.

Disadvantages of Strategic Alliances

The disadvantages associated with the strategic alliance are given as follows:

1) Hold Up

A hold-up may take place even in the absence of adverse selection. Once a strategic alliance is established, the partners may invest in ventures that have significance solely within the boundaries of the said alliance and not in any other activities. Strategic alliances underscore the importance of carefully considering the potential benefits and drawbacks of such investments, as they may not hold value outside of the partnership.

2) Adverse Selection

Adverse selection poses significant challenges to strategic alliances. The potential for cooperative partners to misrepresent their skills, abilities, and resources can lead to detrimental outcomes. In allying, one partner may promise to bring resources that it either does not control or cannot obtain.

3) Moral Hazard

A moral hazard is a phenomenon where partners in an alliance possess high-quality, valuable resources and capabilities, yet they fail to make them available to alliance partners.

4) Distribution of Earnings

The distribution of earnings has emerged as the most serious issue among alliance partners. As the partners share costs and risks they also share profits. This amounts to an oversimplification of the issue. Other financial considerations can cause conflict.

5) Access to Information

Access to information is a potential drawback of strategic alliances. For collaboration to work effectively, one alliance partner (or both) has to provide the other with information it would prefer to keep secret. Identifying and accessing information needs ahead of time can often prove to be a challenging task.

6) Changing Circumstances

The viability of a strategic alliance may be impacted by changing circumstances. The cooperative system may not be viable due to changes in economic conditions or technological progress. It is necessary to assess the current situation and whether the cooperative system is still a viable option.

7) Potential Loss of Autonomy

Loss of autonomy is a potential drawback of a strategic alliance. It is for this reason that the late Dhirubhai Ambani never accepted the idea of allying. Though he bought the technology from DuPont for their PFY plant at Patalganga but declined the offer of equity participation.

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