Advantages and Risks of Strategic Alliances
In recent years, the growth of strategic alliances has been exponential. This is due to factors like new technologies, globalization, and the desire to expand. A strategic alliance is simply a business strategy between two or more entities that work together for common goals and mutual benefits.
Strategic partnerships lead to economies of scale and increased market share. They are driven by the benefits of resource pooling and risk sharing. This results in a strong synergy to execute projects, more core competencies, and a higher profit margin.
There are both advantages and inherent risks when bringing a premium channel partner into the fold. In this article, we’ll examine the type of strategic alliances you can form, the benefits, risks, and successful techniques used to manage the relationship.
Types of Strategic Alliances
In a strategic partnership, both parties remain independent, sharing the benefits and risks involved with their joint actions. Many times, these types of alliances are established when a business needs to acquire new capabilities within its existing structure.
Strategic partnerships include joint ventures, minority equity investments, or non-traditional contracts like long-term sourcing or joint R&D. Here are the three main types in greater detail:
Joint Venture Alliance
A joint venture is formed when two parent companies partner to form a child company. These two companies maintain the partnership by sharing equity and resources, and are bound by a legal contract.
Profits are split between both companies, and there is a clear objective for working together. If one company owns a large percentage of the child company, this is then referred to as a majority-owned venture.
Equity Strategic Alliance
An equity strategic alliance happens when one company purchases a certain amount of equity in another company. This merger can also be referred to as a partial acquisition. However, if each business purchases equity in the other, then this is called a cross-equity transaction.
Non-Equity Strategic Alliance
When two companies sign a contract to pool their core capabilities, resources, and decision-making, it’s called a non-equity strategic alliance.
No separate business is created, and equity-sharing is not an option. These channel partnerships are often more flexible and informal than strategic partnerships that involve equity.
6 Benefits of Strategic Alliances
When it comes to entering a strategic partnership, there are functions that will benefit your business model, infrastructure, and company as a whole. Here are six of them:
New Market Opportunities
Strategic partnerships are an effective way to introduce your brand to new markets, reaching different customers instantly. Companies can avoid the initial challenges of entering a new market independently. They do this by forming an alliance with a business that already has existing customers in the target market.
Learn New Technology
When a business partners with a company that has different tools and resources, teams can use this opportunity to learn new technology and obtain more skills. This is a mutually beneficial exchange that enhances operations for both brands and increases stakeholder satisfaction.
More Resources Available
When businesses enter into an alliance, they work for a common goal by dividing resources and fixed costs.
According to a respected text on the subject, “Resource and Risk Management in the Strategic Alliance Making Process.” Academy of Management Journal (Das, T. K., & Teng, B. 1996b.) there are four types of critical resources that strategic alliances bring to the table: financial, technological, physical, and managerial.
New Distribution Channels
When brands share resources, companies are able to establish business relationships with new distribution channels. It’s the secret to reaching new prospects.
It helps to increase reach and the accessibility of your new products or services. It also leads to risk reduction when exploring new avenues, since your partner has already been there.
Grow Brand Awareness
Strategic alliances will improve a brand’s image and introduce your business to other markets. Customers will trust your messaging if it’s linked to your partner that they already know. Partnerships are some of the most effective ways to market outside your normal target market.
International Business Relationships Opportunity
Entering an international market is a difficult and complex process. However, a strategic alliance between two international brands can make it easier for foreign companies to establish their business.
Risks of Strategic Alliances
In strategic alliances, there are two main types of risk:
- Relational risk
- Performance risk
Relational risk involves the trust you build with your partner, regulations governing behavior, and relations in the alliance. The more trust established, the less relational risk you face.
Performance risk relates to how well your partner does with the job. This risk looks at whether a firm can achieve the goals set out and if the alliance is fully operational. Synergy and communication help to reduce performance risk, with accountability distributed among partners.
Shared Financial Resources Loses
A business can donate financial or technological resources, but not trust the goodwill of its partner. In this case, the investing firm should oversee the delegated resources to ensure they’re used properly. This can put a strain on the relationship, where the partner feels micromanaged.
For better control, a business may want to rely on a hierarchical business structure (joint venture) or put its people on the board (equity alliance). This way, a business can overrule strategic decisions made by the partner if they are too risky.
A company may also want to protect its technology by learning to cooperate without giving tacit knowledge. Unintended transfers of proprietary material can occur at any time. Use patents to protect your IP as much as possible, and only let partners utilize or copy patented technologies.
Firms need to think about reducing the transparency of their technology, limiting the scope of agreements, and following an incremental approach. Giving incremental work is always better than signing a wholesale agreement.
Partners With Opportunistic Behavior
Companies that may not be concerned as much with performance, should work on guarding against cheating and opportunistic behavior. This can happen from a failed contract or trusting the wrong partnerships.
Building trust in strategic alliances is an important aspect of gaining a competitive advantage, and any opportunistic behavior should be squashed immediately. The stronger the relationship, the less relational risk.
With a lack of trust and mutual understanding, conflicts will build up over time. Companies may start disagreeing on basic philosophies, controls, and objectives. This is a red flag that the partnership is on a sinking ship. This is also prime time for opportunistic behavior, so beware.
Lack of Strategic Management
Although firms may give managerial resources to the alliance, some may still have a hard time letting go of managerial authority. In this case, a business wants to ensure they have the room to make final decisions on managerial issues.
This can be done by placing your best people in key positions in the alliance (like the executive committee or board of directors) and also keeping those best people from being recruited by your alliance partner.
Lack of managerial efficiency is a real thing and can lead to failed strategic partnerships. Firms must be able to trust each other, so the orientation is focused on how best to exploit managerial competence for each business. To do this, each firm must have competent alliance managers and assign the best people to the job.
Additionally, alliance managers should be kept long enough in the venture, so they have time to develop effective skills. That’s because valuable assets take time to nurture and grow.
Changes in the Business Environment
This type of risk means companies are uncertain about the market, trends, and relevant events related to a partner. Changes in the business environment can threaten a strategic partnership and affect business strategies. Although firms can build trust with partners, they may still worry about the outcome of products. Alliances may not be able to produce expected outputs without modifications to your agreement.
Companies should be flexible and responsive in these cases. That means, positioning yourself for an easy withdrawal and not explicitly dedicating resources to the alliance. Consider recurrent contracts that include short-term agreements. These renew with each acceptable performance and can be used in buyer/supplier relationships, licensing, and manufacturer/dealer alliances.
Unfit Business Model
In this case, two companies may try to form an alliance, but the culture is strikingly different and causes difficulties. When brands have two different nationalities, the divide can be even greater. Language barriers cause conflicts between the staff and management of both partners.
Teams might find it hard to communicate and convey what they need effectively. When something unexpected happens, these differences are particularly highlighted. Unless both brands figure out how to work together, the alliance is in trouble and will most likely fail.
6 Risk Management Techniques for Successful Alliances
In order to effectively mitigate risk, improve business relationships, and reduce the failure rate, there are certain management techniques that can guide you. Here are six tips for successful risk management you can practice today:
1. Work on Building Trust
Perhaps the most important strategy of all, nothing gets off the ground without building some level of trust first. Intelligent brands form special units responsible for enabling and supporting strategic partnerships.
This increases the scope of the partnership, creates more efficient coordination, and builds up expertise. It also legitimizes competence, institutionalizes organizational memory, and ensures the brokering of knowledge.
A portfolio approach has been deemed the most effective. The broader the scope of the partnership, the greater the success. The best way to build a stable partner relationship is by:
- Extending the duration of the partnership (engagement correlates with alliance length)
- Formalizing the relationship as much as possible, leading to more control
- Entering an equity alliance, which increases the embeddedness of partners
2. Strategize the Business Model
It’s important to strategize at the business model level. While strategic partnerships are sometimes formed to address substitution and competitive threats, changes should be introduced at the strategy level. This includes processes, organizational structure, and commitment. Brands must clearly define the areas in which partnerships should be built based on objectives, as well as a general strategy.
3. Expand the Research on Possible Partnership Opportunities
When looking for partners, cast the widest net possible. Consider the whole ecosystem of strategic partnerships. Companies that only mull over a few options, experience a decentralized and ad-hoc screening process that can lead to failed alliances.
Businesses must use a variety of mechanisms in their search for partnership opportunities. Look in places like:
- Existing contact networks (research partners, suppliers, etc.)
- Specialized industry organizations
- Conferences and associations
- Online forums and communities
When screening, look for partners that can fill the gaps in your technology and capabilities. You should also be keenly aware of consumer insights and limit your number of growth areas. Consider competencies and culture, as well as their readiness to invest “in kind.”
4. Choose the Best Type of Strategic Alliance for Both Parties
As discussed above, there are a few different ways to structure a strategic partnership, and you should choose one that works best for everyone involved.
Brands choose a non-equity strategic partnership when there is market uncertainty, risk of damaging existing partnerships, a high organizational fit, and the existence of several potential partners (start loose and create internal competition).
Companies typically choose a joint venture when there is a difference in size or culture. This minimizes the risk of the smaller partner under-committing. However, this type of partnership will only succeed when both parties are independent. It might also be a good idea to recruit fresh faces where the company cultures are not ingrained, and the project is prioritized over either company’s individual goals.
Keep in mind, joint partnerships are the least popular of strategic alliances and can be the most challenging to manage. The average lifespan of a JV is 7 years, and according to recent research, that’s because joint ventures spend too much time on steps where less value is at risk.
50% of the time is spent in negotiations, which only constitutes 10% of the value at risk. On the contrary, only 20% of the time is spent on the business model and infrastructure, which represent 40% of the total value at risk.
5. Make the Partnership a Priority
Developing a supportive culture is vital to the success of a partnership. This means recognizing strategic alliances as a corporate priority, including communication strategies. Teams, partnership leaders, and C-suite should all be working together towards a shared goal.
When conflicts happen, which is inevitable, you must be open to identifying and agreeing on the issue at hand. This requires interest-based problem-solving like:
- Focusing on interests
- Separating people from positions
- Creating mutually beneficial options
- Developing a contingency plan
- Clarifying the commitment on both ends
The partnership contract should include a clause that allows both parties to revisit the contract, as well as conditions for escalating issues, veto rights, etc.
6. Consistently Measure Performance
Predicting and measuring alliance performance is the secret to building a strong channel partner relationship.
Measuring strategic partner performance requires a multidimensional analysis, according to studies in the Strategic Management Journal. Short-term performance will be primarily affected by access to strategically critical and complementary resources. Long-term performance will be related to investments in human capital, combined with the ability to expand alliance activities over time.
This is why consistently tracking alliance performance is important for a successful business partnership.
Strategic Alliance Examples
When it comes to a case study on successful strategic alliances, Nestlé and Starbucks are two prime examples.
Nestlé Strategic Alliance
Nestlé has adopted a strategy of a partnership-based model for their areas of innovation and R&D. They did this in order to fight competition and imitation.
The in-house system was no longer capable of sustaining growth to keep up with competitors. Nestlé had 5,000 people working in R&D in mixed business units with no flexibility or efficiency for managing strategic partnerships.
As a solution, Nestlé mapped existing R&D expertise inside the company to identify opportunities for shared knowledge and expertise, as well as potential areas for open-source innovation. They also created a special business unit dedicated to strategic partnerships.
The result was Nestlé developing a profound practice for strategic partnerships, and building a broad scope of alliances across different companies, startups, universities, and venture capitalists.
Starbucks Strategic Alliance
Starbucks first attempted to enter the Indian market through a joint venture in 2007. However, this failed due to a lack of government approval. In 2010, the FDI regulations changed, allowing 100% foreign ownership in Indian companies.
A year later, Starbucks attempted again. This time, they partnered with a national brand possessing expertise in local government and the supply chain.
TaTa, India’s largest coffee grower, was chosen as Starbucks’ strategic partner in India. It began with a non-binding, open-ended Memorandum of Understanding, that was signed at the top level.
However, they still needed to solve several issues before solidifying the partnership. This included pricing, branding, growth pace, equity stake, and supply chain. After intense negotiations, a JV was formed with a 50/50 equity stake, creating a sustainable growth strategy.
Since then, Starbucks launched in Mumbai in 2013 and has continued to expand throughout India for the past ten years. All due to a strategic alliance.
The Bottom Line
A strategic alliance isn’t much without the strategy part. Before you partner with anyone, it’s important to put in the work. It starts with building trust and establishing a shared business model.
When searching for the perfect partner, exhaust every avenue and don’t limit yourself to past relationships. Choose the best strategic alliance that works for everyone and foster partner enablement by putting them first. Then, consistently measure performance until you get it right.
It’s critical to consider all the inherent risks and benefits involved in strategic alliances. Risks can include everything from opportunistic behavior and poor performance to loss of resources and lack of management. Benefits can include growing brand awareness, access to more resources, additional technology, and new markets.
Alliance risk management is key to a successful partnership, and that starts with the right tools and technology, like Relevize.
Relevize provides everything needed to turn partners into your best revenue channel. From seamless onboarding to targeted campaigns, marketing analytics, and expert advice. Relevize can help you optimize the entire end-to-end strategic alliance process and be there to guide you on every step. Sign up for a free demo now.