The two basic approaches to successfully managing a strategic alliance involve

A strategic alliance is an arrangement between two companies to undertake a mutually beneficial project while each retains its independence. The agreement is less complex and less binding than a joint venture, in which two businesses pool resources to create a separate business entity.

A company may enter into a strategic alliance to expand into a new market, improve its product line, or develop an edge over a competitor. The arrangement allows two businesses to work toward a common goal that will benefit both.

The relationship may be short- or long-term and the agreement may be formal or informal.

While the strategic alliance can be an informal alliance, the responsibilities of each member are clearly defined. The needs and benefits gained by the partnered businesses will dictate how long the coalition is in effect.

• A strategic alliance is an arrangement between two companies that have decided to share resources to undertake a specific, mutually beneficial project.
• A strategic alliance agreement could help a company develop a more effective process.
• Strategic alliances allow two organizations, individuals or other entities to work toward common or correlating goals.

The effects of forming a strategic alliance can include allowing each of the businesses to achieve organic growth more quickly than if they had acted alone.

The partnership entails sharing complimentary resources from each partner for the overall benefit of the alliance.

Strategic alliances can be flexible and some of the burdens that a joint venture could include. The two firms do not need to merge capital and can remain independent of one another.

A strategic alliance can, however, bring its own risks. While the agreement is usually clear for both companies, there may be differences in how the firms conduct business. Differences can create conflict. Further, if the alliance requires the parties to share proprietary information, there must be trust between the two allies.

In a long-term strategic alliance, one party may become dependent on the other. Disruption of the alliance can endanger the health of the company.

The deal between Starbucks and Barnes&Noble is a classic example of a strategic alliance. Starbucks brews the coffee. Barnes&Noble stocks the books. Both companies do what they do best while sharing the costs of space to the benefit of both companies.

Strategic alliances can come in many sizes and forms:

• 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.

Strategic alliances are agreements between two or more independent companies to cooperate in the manufacturing, development, or sale of products AccountingOur Accounting guides and resources are self-study guides to learn accounting and finance at your own pace. Browse hundreds of guides and resources.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 Joint Venture

A joint ventureReal Estate Joint VentureA Real Estate Joint Venture (JV) plays a crucial role in the development and financing of most large real estate projects.  is established when the parent companies establish a new child companySubsidiaryA subsidiary (sub) is a business entity or corporation that is fully owned or partially controlled by another company, termed as the parent, or holding, company.  Ownership is determined by the percentage of shares held by the parent company, and that ownership stake must be at least 51%.. 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.

Learn more in CFI’s Corporate and Business Strategy Course.

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:

#1 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.

#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 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.

#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

Strategic alliances create value by:

1. Improving current operations
2. Changing the competitive environment
3. Ease of entry and exit

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)

Changing the competitive environment through:

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

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).

Learn more in CFI’s Corporate and Business Strategy Course.

Challenges

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.

Related Reading

Thank you for reading CFI’s guide to Strategic Alliances. To keep learning and advancing your career in corporate finance we recommend these additional free CFI resources to help you along your path:

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